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Investment Green Flags – Decreasing Shares Outstanding

Investment Green Flag: Decreasing Shares Outstanding

Share Buyback Programs

A company purchasing back its shares tends to increase the stock price for a couple of reasons. First, it shows that the firm and its employees are confident in the direction the company is heading. Second, it cuts down on the shares available for investors to purchase, driving the price up through restricting supply. Below, we’ve outlined one of our green flag indicators, “Decreasing Shares Outstanding.”

Like all green flags, we want to keep this as simple as possible. We are building a piece of a larger score, not an entire screener.

  • Diluted Average Shares must have decreased over the last quarter.
  • Diluted Average Shares must have also decreased over the last year.

Incredibly simplistic, but does it work?

At first glance, it appears we have a pretty good green flag here. It significantly beats the S&P over the past 20 years. That the flag is matching more companies is an interesting phenomenon that took off during the Great Recession. Companies were trying to exhibit strength in the injured marketplace, through a metric they can more easily control. Since then, several high-profile activist investors have been pushing companies to institute share buyback programs to increase confidence and returns.

Past beating the market, we want to ensure that the potential green flag beats the market more often than not. We also want to make sure that the flag has more years with positive returns than negative returns.

Just like with our red flags, a certain percentage of positions need to give us a certain return. The difference is that, with green flags, that percentage over 50% of trades netting a positive return. We get a bit more than that here, with just under 60% of all trades making money.

Beyond the returns, we also need to make sure that these positions aren’t isolated to any one industry or market cap. It is a bit concerning that over half of the positions taken on are classified as small cap companies, but these are spread pretty evenly throughout a virtually every sector. From what I can see here, this is a pretty solid green flag.

Now, though these green flags are making more money than they are losing, I wouldn’t use any one green flag as your entire investment strategy. There’s a reason we keep these simple, and that’s to give you, the user, wiggle room to add your parameters and build the perfect investment strategy for your needs.

Tyler McCain
Tyler McCain
A student of finance at Georgia State University, Tyler has had a passion for the world of finance for as long as he can remember. Joining the Equities Lab team in 2015 he attempts to juggle the perfect mix of school, work, and giving back to the community. When he isn't working at Equities Lab he can often be found helping teach programs at the Rosen Family Foundation - a non-profit that teaches financial literacy to middle and high school students.

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