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Thursday, August 03, 2006

Cramer's MAD MONEY Reviewed Share Buybacks

In the "Feature Round," Cramer said it was important to evaluated stock buybacks. Cramer likes stock buybacks, but not unilaterally. A buyback is supposed to be a signal that management believes in the company for the long run. Cramer likes share buybacks like Pepsi (PEP), Wells Fargo (WF), and Bank of America (BAC). He said these were signals that the market had undervalued those stocks.

Cramer also reviewed 4 BAD buybacks:

1) The Borrowed Buyback: a buyback should not be financed by borrowing money.

2) The Botox Buyback: a buyback to shrink the outstanding shares to artificially make EPS look larger. He cited Energizer (ENR)

3) The Schizophrenic Buyback: Buying back stock when the company needs the cash. He cited Performance Food Group (PFGC) after it bought back 20% of its float when it needed cash.

4) The Impotent Buyback: buybacks that don’t shrink the outstanding shares. He used Yahoo! (YHOO) as the example.

Cramer went on and described 4 GOOD buybacks:

1) Value Buyback: where a stock is worth less than its net asset value. He cited OMI Corp (OMM).

2) "Nobody Believes In Us" Buyback: Where no one cares. He cited JC Penney (JCP) as having bought back stock several times and no one noticed or cared.

3) "Afraid of Being Taken Over" Buyback: When companies realizes that it's worth more to another company it may try a defensive by buying its shares. He cited he cited Ingersol-Rand (IR) and Medicis (MRX) as examples.

4) Depression Buyback. Cramer cited Devon (DVN) after it bought 10% of its outstanding stock because the company thought energy prices were too low.
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