More than half of the stocks in the S & P 500 hit new 52-week highs in the first quarter, leaving us to puzzle over how this all happened. We act as if it’s all about the earnings or the actions of the Federal Reserve. But maybe it is something else. Maybe it’s the share count that trades versus the portion that doesn’t? It’s a strange commonality that’s never talked about. Let’s talk about it. I want to start with the housing sector, the group that should have been obliterated by the aggressive tightenings by the central bank — 11 total in the cycle. We can just look at the vulnerability of the group and wonder how it could come out unscathed. The balance sheets have to be in tatters, the issuance must be a horror show. But what if I told you this group shrunk its share count dramatically since 2019? The numbers tell the story: Lennar now has 276 million shares outstanding, down from 318 million five years ago. Toll Brothers has 105 million, down from 145 million. PulteGroup has 215 million shares, down from 275. KB Homes is down to 75 million from 88 million, while DR Horton dropped to 333 million from 372 million shares outstanding. This change is incredible and unheralded — and largely unnoticed. With 22% of the S & P 500 held by passive index funds, you have a phenomenal, ever-shrinking denominator. That results in what the strategists would call a secular change. But it’s nothing of the sort. It’s a recognition that these shares are more precious than the land that they could accrue without options. Remember the homebuilders can option to buy land not just buy it. Other than Toll, most of the homebuilder management teams do not emphasize this fundamental change in share count. I wouldn’t have thought much about it if CEO Douglas Yearley hadn’t repeatedly talked about it in his amazing, clinical calls with investors. Those of us who have been at this long enough know that this group lacked discipline, or at least didn’t seem to care about the value of the shares. They cared about buying land and putting up homes. We know we have a shortage of homes. You are not going to see much from these companies to alleviate the shortage. Why bother? It is so difficult for them to find parcels, especially in places like California which have turned pretty radically against development. The number of homes built has been incredibly low recently and historically. The homebuilders showed amazing discipline between 2022 and 2023, building 1.46 million, down from 1.5 million a year earlier, a 9% decrease. Compare that to the last time we went into a tightening cycle in 2005 when homebuilders put up 2.1 million new homes. We had 295 million people in the country back then, and now we have 334 million. Do you want to get nostalgic? In 1973 we put up 2.289 million homes with 210 million people in the country. (With 226 million people in 1980 we built 1.3 million just for perspective.) In other words, with a soggy economy in 1973, we built like crazy with far fewer Americans (using census data not extrapolation of illegal immigrants from any poll). In 2005, before the housing bubble burst, we were smitten with housing at 2.1 million even as rates were about to tighten. To put it more bluntly, the homebuilders showed no discipline whatsoever going into vicious tightening cycles. They learned their lesson. But the investors and hedge funds didn’t. Anecdotally, this was the group to short. In retrospect, it was the group to cover, hold, and buy because the builders paid little attention to census numbers and, instead, focused on shares versus land buys and decided, emphatically go to with the former. Strange? Erratic? How about brilliant? Brilliant like a lot of other companies. We bought consumer tech retailer Best Buy this week for the trust. Why not? Management has been buying hand over fist since 2019, shrinking the share count to 215 million from 264 million. You get a PC refresh cycle and a resumption of renovation and repayment, you are going to see a spike to beat the band. That’s what we saw with: Dick’s Sporting Goods , which took its share count to 80 million from 87.5 million Abercrombie & Fitch , an amazing performer, which went to 50 million shares from 64 million Williams-Sonoma , which shrunk to 64 million from 78 million Autozone to 17 million from 25 million (and you wonder why I am so focused on it.) These are simply phenomenal reductions in shares over the last five years. If we throw auto retailers — AutoNation (42 million shares outstanding from 90 million) and Carmax (150 million from 174 million) — we still see a ton of discipline. Think about it all like this: The specialty retailers have been picked on and shorted endlessly. Bad call. You can challenge the big boxers. Only Walmart has taken down its count to 8.1 billion from 8.6 billion. But that’s a distinct outlier. The companies that found their stocks cheap had some spectacular performance during the comeback from the tightening cycle and were buying all along. So were the cyclical stocks: Caterpillar CEO Jim Umpleby has been a gigantic buyer of stock since 2019, shrinking the share count to 504 million from 561 million Eaton is down to 401 million shares, from 420 million Illinois Tool Works dropped to 300 million from 323 million DuPont had a crazy decrease to 430 million from 746 million (a reorganization played a role) Dow cut its share count to 703 million from 742 million Cummins went to 141 million shares from 155 million Oh, and you want voracious? Consider the economically sensitive refiners, one of the best-performing groups in the entire market: Marathon Petroleum is down to 584 million, from 810 million shares outstanding. (Elliott Management, which almost always goes after companies that they think are undervalued and should be buying back stock, has a lot to do with this.) Valero Energy decreased its shares to 337 million from 413 million. Finally, the always proxy-attacked rails: Union Pacific to 608 million shares from 703 million Norfolk Southern to 226 million from 263 million (under siege right now from an activist with a proxy contest on the horizon.) CSX to 1.9 billion from 2.38 billion Lest you think this is all one giant aberration, the tech and healthcare companies, under-performers at times, have sloppy issuance almost routinely. It’s embarrassing how much stock the techs issue, but that’s the stock-based compensation that’s so prevalent. It’s not a coincidence that five hedge funds demanded that Salesforce CEO Marc Benioff stop issuing stock and start buying back his company’s float. As of Jan. 31, it stands at 984 million shares, down from 997 million a year earlier. The stock’s been moving in the right direction. Sure, there are tech rocket ships with earnings that exceed share count like Nvidia . Although, interestingly enough, CFO Colette Kress has kept the share count steady at 2.4 billion since 2021. Apple is a serial buyer, taking its shares down to 15.9 billion from 18.6 billion in 2019. Microsoft did too, going to 7.43 billion from 7.6 billion — a little lighter than people would like. There are not many other significant buyers other than Meta Platform’s trading class — to 2.63 billion from 2.88 billion. Most of the other sectors just don’t make it an imperative. The pattern is unmistakable. To be oblivious is to ascribe qualities to companies that aren’t deserving. The earnings can fluctuate. But the buybacks? Not so much. It’s something I wish I had paid more attention to. We had a nice win in Caterpillar’s stock but it just kept powering higher, another 60 points from our abandonment. That’s the share count speaking more than the earnings. What does it all mean? It’s a recognition by corporate America that if you issue stock you better have some real secular wave going for it, because otherwise you will be left behind by despised cohorts like mall stores: ANF, Best Buy, Dick’s, and Williams Sonoma. The railways and the refiners just won’t let you short them without real consequences. Share reduction leads to better stock prices because of the growth of passive index funds. They are so voracious that one can only guess how hard it must be to reduce a share count by 300,000 to 500,000 shares without moving the stock. You can buy all you want of the techs that size. They trade, as they say in the business, like water. Same with healthcare stocks, as the companies have to issue stock to find pipelines externally. My rather unassailable conclusion is pretty simple: Check the share count before you buy a stock. You want a management that agrees with you, not one that thinks it can give away stock as compensation, often to throw you off the scent of adulterated earnings power. Or, to complete the cycle: If you short the homebuilders, send me an invitation to your funeral. They know what’s happened in this country: we are against building no matter what the homes cost, up 40% in the last five years. Maybe they all learned their lessons from 2005. Or maybe they learned the lesson of passive investing and dear land, the lesson that says you have to be crazy to think that the stock of a homebuilder has anything to do with a Fed tightening cycle. It’s only in the alternate world of endless focus on the Fed that it matters. What a disservice we have done to the average investor in our relentless Fed coverage if we are about helping people make money. But it’s darned good if we only care about the competition of cash versus stocks. And there, with indexing and a 4-5% rate, the shining of stocks with lower share counts is even more outstanding. I lament the abstruse Fed coverage. When I covered general assignment stories as a reporter we looked at the day book — a release of whatever standard numbers would come out, including things like homicides and robbery, and would do stories as a matter of rote because we had little else to do if there was nothing else going on. Now every rotary speech of any of the myriad Fed officials is covered as gospel. It should be gospel if you are a theoretician. But stay out of my zone. I can’t tackle you. This isn’t the NFL. I can make it so the coverage is so strong that the offense will go elsewhere. Right now, that’s good enough for me and I hope, Club members, it’s good enough for you. (See here for a full list of the stocks in Jim Cramer’s Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust’s portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.
Construction workers work on a home, as a subdivision of home is built in San Marcos, California, January 31, 2023.
Mike Blake | Reuters
More than half of the stocks in the S&P 500 hit new 52-week highs in the first quarter, leaving us to puzzle over how this all happened. We act as if it’s all about the earnings or the actions of the Federal Reserve. But maybe it is something else. Maybe it’s the share count that trades versus the portion that doesn’t? It’s a strange commonality that’s never talked about.
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