Fundamental Analysis and Position Trading: Evolution of a Trader

CHAPTER 11

Shares Outstanding

A company issues shares to the public and collects money for doing so. What else is there to know? Plenty, it turns out. For example, if a company buys back stock, does it mean performance is likely to improve next year and in following years? What about companies that issue new shares? Does that hurt or help performance? Along with answering those questions and others, I discuss Dutch auction tender offers and the behavior of a stock after a company sells more shares.

• Shares outstanding are shares issued by a company, sold to the public, and still publicly available (not repurchased).

PERFORMANCE VERSUS SHARES OUTSTANDING

When IBM has a successful year, the company may look for other companies to buy. If IBM is growing earnings by 15 percent yearly, buying Podunk Computer whose earnings are growing at 10 percent annually is a nonstarter unless IBM thinks it can turn Podunk around or Podunk has a valuable asset (like patents) that IBM covets.

Buying another firm is an expensive and risky proposition. A company may not get its money's worth and combining the two rarely works well anyway.

Instead, should IBM invest in itself? Since the company is growing 15 percent annually, it can earn a good return by buying its own stock. Buying back stock also changes financial ratios like earnings per share and book value per share. With fewer shares outstanding, earnings climb. When earnings climb, the stock price tends to follow. Everyone wins. Should the company ...