Beware Of What Companies Do With Their Own Stock

When a company's share price skyrockets or plummets, it creates opportunities for the company itself. In the case of weakness in the share price, the company can initiate share repurchase programs as they firmly believe the market has undervalued their company. In periods of a broad market decline, those repurchases can offer support to the issue. For example,

remained on the sidelines while the issue cascaded from $705.10 to $385.10. However, when the company increased its stock-repurchase program to $60 billion on April 23, 2013, the issue was changing hands in the lower $400's. If an investor had followed the lead of the company (and Carl Icahn for that matter), they could have purchased the issue, knowing full well the company would be supporting the share price on any declines. Since that time, AAPL has rallied up to $575, before retreating to the $500 level, where once again the company stepped in to defend the stock after a disappointing Q1 report on January 27. Although it did manage to bounce to $550.00, the shares are beginning to slide back to the $500.00 level. It will be interesting to see if the company once again defends the share price at this level, as many investors are anticipating.

On the other hand, when an issue far exceeds the company's own expectations for its share price, it can do one of two things besides selling its own shares. They can make a secondary offering of its shares to raise cash, or they can use the inflated share price to buy other companies. Two excellent examples of this phenomenon are exhibited in the recent price action of

and

. Cloud security darling, FEYE dazzled shareholders with a mind-boggling run from $33.30 to $97.35 in a four-month span (November to March). With the closing price at $95.63 (all-time high close) on March 5; the next day, the company announced a follow-on secondary offering of 14 million shares to the public at $82.00, a steep discount to the March 5 close. Although the issue held its own on March 6, it did lose six points from its all-time high closing price and ended the day at $89.55. When the stock was delivered on March 7, FEYE shed another eight points to end the session at $81.04 on monster volume of 18 million shares. For shareholders that were able to wiggle out of the stock above $82.00 during the next two sessions, they were able to book a profit. For those who did not hit the panic button and decided to hold on to the issue, FEYE was trading at $76.00 one week later, $70 two weeks later and if they were holding as of Monday, they were over 30 points underwater with its $50.35 close.

Another option for a company is to use its inflated share price to buy other companies to augment future growth. There is no better example of this then the recent buying spree by FB. If using its inflated share price to overpay for WhatsApp ($19 billion for a company with no earnings) on February 19 wasn't enough, Mark Zuckerberg and company really took advantage of its ridiculous valuation to purchase Oculus for $2 billion on March 25. Once again, a company with no earnings, but a pioneer in 3-D glasses. It should be noted that when these two cash and stock mergers were announced, FB was trading at $68.06 and $64.89 respectively -- quite a distance from its closing price on Monday ($56.95). Although FB did not sell the top like FEYE did, the company was able to take advantage of its valuation not far from the top ($72.59). The Street did not catch on to FB shenanigans after the WhatsApp purchase, but did pay attention after the Oculus purchase and took the issue down over $4.00 ($64.89 to $60.38) the following day. What can investors learn from the price action of these two issues following unprecedented runs in their shares? Buyer beware of any secondary offerings, as the dilution can lead to follow-through weakness. Also, when a company is freely offering its stock in acquisitions, it may be a telling sign that the company itself perceives its shares to be overvalued.