Buybacks And Equity Issue Trading System & Strategy suggests that companies that buy back (repurchase) more of their own shares tend to outperform.
In one study, researchers Amini and Singal looked at 15,106 buyback announcements between 1994 and 2015. They found that companies that repurchased shares shortly before an earnings release went on to show persistent positive raw returns of 3.31%.
The buyback anomaly also appears to make logical sense.
Company directors are best placed to know whether their company has had a good quarter therefore stock buybacks shortly before earnings releases may contain useful information for other investors to take advantage of.
The equity issuance anomaly is a similar effect and was discussed in the same paper mentioned above.
This time the researchers looked at 19,466 seasoned equity offerings (not IPOs) between 1970 – 2015 and found the opposite effect.
Shorting stocks that had recently issued new equity (SEO) prior to an earnings report was shown to produce a significant net profitable return.
The explanation is that equity issuance is a bearish signal often done to raise money in a flagging business and that this gives off information that predicts negative earnings.
The first chart below shows how returns improve in the days following earnings in stocks that have buybacks. The second chart shows how returns fall in stocks that initiate seasoned equity offerings:
Buybacks And Equity Issue Trading System & Strategy:
You should go long stocks that announce share buybacks in the two days before earnings announcements and hold for up to 15 days.
You can short stocks that announce equity offerings two days before earnings announcements and hold for up to 30 days.