Goldman Sachs Says 2022 Could Be the Year of Stock Buybacks

Electric vehicle (EV) makers are leading stock index futures higher on Monday. Lucid LCID is up to move then 8% in premarket trading after the company announced over the weekend that its first customers received their cars. Xpeng XPNG also announced the second month of strong deliveries prompting a premarket rally of 4.2%. Tesla TSLA appears to be rallying in sympathy with these stocks because it was up more than 4% before the opening bell.

Automaker stocks are also being helped by the news that the U.S. and European Union agreed to a deal on steel and aluminum tariffs. Harley-Davidson HOG rallied more than 7% on the news.

Crude oil (/CL) was trading slightly higher before the opening bell. Last week, the commodity had its first down week in 10 weeks.

Analysts from Morgan Stanley raised their price target for Spotify SPOT prompting a rally of more than 2% in premarket trading.  

There are more signs that things are getting back to normal as COVID-19 cases decline. One sign is earnings from global hotel and accommodations search platform trivago N.V. TRVG which posted a profit for the third quarter on higher demand for hotel rooms. People are also getting back into theaters as AMC Entertainment AMC reported strong ticket sales in October.

Vaccine stocks are mixed in premarket trading with Novavax NVAX rallying more than 11% but Moderna MRNA is down about 3%. Novavax was able to get its COVID-19 vaccine authorization from Indonesia and submitted data on its vaccine to Canada’s health authorities for approval. But Moderna reported that the FDA needed more time to review the use of its COVID-19 vaccine for 12 to 17-year-olds.

As expected, the FDA authorized the use of the Pfizer PFE and BioNTech BNTX COVID-19 vaccine for emergency use for children ages five to 11 late on Friday. However, only Pfizer rallied on the news. BioNTech dropped 1.85%. Because the news came as no surprise, the market may have already discounted the development.

Is 2022 the Year of Buybacks? 

On Friday, Bloomberg reported that Goldman Sachs Strategists see a lot of S&P 500 (SPX) companies flush with cash, which will likely be used for stock buyback or repurchase plans. The total combined purchases could be as high as $872 billion next year. Recently, during their earnings announcements, Exxon Mobil XOM, Chevron CVX, and Apple AAPL followed the trend of reiterating their stock buyback programs to their investors. Goldman’s analysts also see the possibility of increasing dividends but not on the level of buybacks. 

There are several reasons a company might choose buybacks over dividends. Buybacks allow a company to reward investors while attempting to protect the company’s stock price. Dividends also reward investors, but when they’re paid, the stock price often decreases. During a buyback, investors can sell shares and get cash with a lower risk of negatively impacting the stock price.

Critics of buybacks claim that they are a way to inflate stock prices. A study from 2011 to 2019 by Ned Davis Research found that the S&P 500 would be 19% lower without stock buybacks. Because a company’s management is often compensated through stock options and awards, the effect to the stock price may incentive executives to use these programs to push the stock price higher instead of organically growing the business.

However, proponents of buybacks would see these numbers as evidence that the company is accomplishing its primary goal of maximizing shareholder value.

Stock buybacks are complex with pros and cons. Learn more about them by watching our recent video: What Are Stock Buybacks, and Why Are They Controversial? 

CHART OF THE DAY: RAKE OVER THE COALS. The Dow Jones U.S. Coal Total Stock Market Index ($DWCCOA—candlesticks) has grown so quickly over the last year that the S&P Energy Select Sector Index ($IXE—blue) and the S&P 500 (SPX—pink) are hardly discernable when placed on the same chart.  Data source: ICE, S&P Dow Jones Indices. Chart source: The thinkorswim® platform. For illustrative purposes only. Past performance does not guarantee future results.

Old King Coal: It wasn’t long ago that the coal industry seemed to be hanging on by a thread as many countries looked to move to cleaner fuel sources. But over the last year, the group has made a comeback because of energy shortages in Europe and China. The Dow Jones U.S. Coal Total Stock Market Index ($DWCCOA) has returned more than 296% over the last year, although there’s no guarantee that it will continue to see those types of returns. The industry group is benefiting from higher energy demands as well as its metallurgical products needed for steel shortages.

Last week, a couple of coal companies announced earnings. On Tuesday, ARCH Resources ARCH missed on earnings but beat on revenue thanks in part to strong growth in its metallurgical products. Then on Thursday, Peabody Energy BTU reported a loss of $0.60 per share, which was greater than the estimated loss of $0.47 per share.

Ramaco METC rallied more than 16% on Friday despite no immediate related news. The company is scheduled to announce earnings November 2, along with Warrior Met HCC and CONSOL CEIX.

Canary in the Coal Mine: The Group of 20 major economies or G20 Summit, began over the weekend and runs through November 12. They will discuss the global economy and climate change. A big area of contention will likely be around the use of coal. China, Russia, and India all have large coal reserves but are receiving pressure from other countries to end their use of coal in favor of helping with climate change. China is already experiencing an energy crunch that has caused factories to shut down from time to time. Between China and much of Europe needing more energy, new caps on coal could be difficult.

Pouring on the Coals: Some professional money managers may be pouring on the coals because they have a tough job. They must figure out a way to consistently beat their benchmark index. A benchmark is a stock index like the S&P 500 against which the manager is measured. The manager’s job is tough because an index doesn’t haven’t to worry about making up for fees, having cash on hand for redemptions, or investing new money into the market quickly. Additionally, indices tend to already hold the most widely traded and researched stocks on the planet, making it difficult to find potential diamonds that others aren’t already aware of.

As the year wraps up, managers who are underperforming their benchmarks sometimes start to beta chase. Beta chasing is where money managers invest in volatile stocks with the hope they’ll perform well through the remainder of the year and help managers catch their benchmarks.

In 2020, many active fund managers were able to pull ahead of their benchmarks because of the success in “work-from-home” stocks. Many of these managers were able to buy those stocks and beat their benchmarks. However, earlier this week, SPIVA’s U.S. Persistence Scorecard Mid-Year Scorecard 2021 found that this success was short-lived. Over a 12-month period, 58% of large-cap, 76% of mid-cap, and 78% of small-cap funds underperformed their respective index.

While we don’t know how these managers have done over the last three months since the report came out, the low mid-year performance could lead to some beta chasing the rest of the year. If this happens, it could cause increased volatility. 

TD Ameritrade® commentary for educational purposes only. Member SIPC.

Image by Leonhard Niederwimmer from Pixabay