Here we go again…

Congressional Democrats have introduced another bill targeting stock buybacks. This latest one is sponsored by Senator Tammy Baldwin of Wisconsin.

Last week, Baldwin’s staff released a report saying that buybacks suppress wages and cause income inequality, while increasing risk in the markets. From the report:

The evidence also shows that Wall Street insiders and corporate executives have abused the American system of corporate governance, spending trillions on buybacks to benefit themselves at the expense of employees and other corporate stakeholders.

But while this new bill is called the Reward Work Act… it has more to do with restricting businesses from running their operations as they see fit than rewarding workers.

It would ban companies from repurchasing their shares on the open market—and also require all public companies to allow workers to elect one-third of the company’s board of directors.

Now, we’ve been down this road before… No matter how well-intentioned these bills are, they’ll likely do more harm than good.

In fact, they’ll make it harder to find the types of money-making opportunities we look for at the Daily. As we pointed out before, companies that buy back shares have historically outperformed the market.

Yet that hasn’t deterred opponents of buybacks, who are continuing their crusade against the markets in the name of “income equality.”

But in today’s essay, I’ll show you why you should still add shareholder-friendly companies to your portfolio before Congress restricts them…

The Buyback Myth

Buybacks boost a company’s stock price by reducing the total number of shares in the market.

But whenever I write about their positives, I get pushback from many readers. That’s because a lot of people buy into the narrative that companies use buybacks solely to manipulate stock prices higher.

For example, one reader told me that “share buybacks screw investors.” Another said corporate executives use buybacks only to “enrich themselves.” (You can click here to read all the feedback.)

Now, if this were true, a company could just buy back its shares and watch the price go to the moon. But that clearly doesn’t happen—otherwise, everyone would be doing it.

And don’t just take my word for it… Palm Beach Trader editor Jason Bodner spent nearly two decades on Wall Street looking at buybacks.

So if anyone knows about the profit potential of shareholder-friendly companies, it’s Jason; his proprietary stock-picking system often flags them before everyone else.

Jason says the narrative that companies use buybacks to benefit themselves is more myth than reality. Here’s what he recently told me:

At their most sinister, it’s true that corporate executives could do that. Granted, I don’t think it always works like that… but for the sake of argument, let’s say it does.

Now, even if executives were buying back shares out of self-interest or greed, the share prices would still be going up for everyone else, too. So all investors would be profiting along with the executives. And that doesn’t sound too bad.

But it would only work in the short term… because most executives receive stock options that are deferred for five to 10 years. So any short-term fluctuations won’t help them out over that time frame.

The real reason stock prices increase after buybacks is because investors own larger portions of the companies—since the number of shares available has decreased. So each investor gets a larger share of current profits.

This is why like buybacks… I want to own bigger pieces of the businesses I’m investing in. It can make a huge difference in the long run.

And I’ll add another little-known reason why companies like buybacks: They’re tax-efficient. While investors must pay taxes on dividends at the end of each year, they don’t have to pay taxes on buybacks until they sell their shares.

So despite what many politicians think, buybacks are good for investors. For example, a recent Harvard study found that owning companies with high CEO ownership leads to an additional 4–10% return over the market.

Now, we don’t think Congress will restrict buybacks anytime soon. But political momentum is clearly moving in that direction. That’s why you should take advantage of these profitable opportunities today…

Where to Look

If you’re looking for a simple way to profit from buybacks, consider the Invesco BuyBack Achievers ETF (PKW). The fund holds companies that have bought back at least 5% of outstanding shares over the past year—including Citigroup, Oracle, and Apple.

But if you want to find the best shareholder-friendly companies in the market, I suggest you consider a subscription to Palm Beach Trader.

Jason’s proprietary system scans nearly 5,500 stocks every day, looking for the best of the best that institutions are buying. When a company starts buying back millions of shares, it likely shows up on his system.

And you can learn how Jason’s $250,000 system flags these big-money trades right here.

Regards,

Nick Rokke
Analyst, The Palm Beach Daily

MAILBAG

The debate about America’s tilt to socialism intensifies

From Clarke P.: I’d say Jack W. just proved your point about socialism taking hold in the U.S. The pendulum is definitely swinging more to the left. And it’s hard to believe how acceptable that’s becoming in such a short period of time. I, for one, didn’t take your comments as a political commentary, but rather as a reality check on the effects that socialism will have on the markets and our investments. Keep up the good work.

From Tony C.: Regarding Jack W.’s comment on political opinions: Yes, I get tired of hearing political opinions (even if I agree with them), too. However, these publications are sometimes the only source of other views—good or bad—out there in the world today.

For example, if you’ve never been outside of the U.S. or even your own state, and you start traveling, you’ll begin seeing a different view of the world. And it really does matter in the long run, regardless of whether your experience is good or bad. When you’re exposed to information that you don’t know or aren’t aware of, you might still benefit from it—even if it’s not what you want to hear. Thanks, and keep up the good work!

From Anthony P.: The government builds tanks that the military doesn’t need… bails out Wall Street and big banks… gives corporate breaks to the tune of $92 billion… and even hands out subsidies to farmers for not growing certain crops. All of it is socialism.

There are many more examples, too: free research money, handing out money to other countries, etc. I could write about it all day, but you get the picture: Both sides are pigs at the trough. 

What’s your take on America’s lean to the left? Let us know right here.

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