Corporate Governance
One of our strongest arguments for fundamental analysis over technical analysis revolves around the board room. A strong leader can create incredible synergies at a company, while a weak leader can take a perfectly good company to the edge of ruin. In this section we look at the role of corporate governance as it directly relates to a company's success or failure going forward.
If economic conditions are deteriorating, why did American companies just buy back $1.1 trillion worth of their own stock? (19 Dec 2018) The latest was aerospace giant Boeing (BA $293-$327-$394), whose board of directors just approved a whopping $20 billion share buyback and a hefty hike in the dividend. The CFO cited strong aircraft demand for the actions. Before that it was Johnson & Johnson (JNJ $119-$130-$149), which announced a $5 billion buyback after shares got pounded on new (unsubstantiated) claims of asbestos in the company's talc. All told, it has been a record year for buybacks at American firms. To date in 2018, over $1 trillion has been committed, and over $800 billion already spent. There is one universal theme to these massive buybacks: the respective CFOs of the companies see their shares as being grossly undervalued. And who would be in a better position to gauge a company's health than their CFO? The global economy is indeed probably slowing a bit, but that doesn't warrant the big selloff we have seen this quarter. Forget what CEOs and CFOs say in quarterly conference calls for the consumption of the analysts and investors; instead, watch what they actually do for clues on how a stock might perform going forward. Buybacks are one of the metrics we use to gauge a company's probable stock performance, at least in the short run.