Over the past four years, companies that have bought back their stock have outperformed the market significantly. Most companies did not finance the buybacks with internal cash flow and borrowed at low rates to buy their own shares. The cost of debt is mispriced, so arguably it was a smart move. However, we are now seeing a hangover from excessive leverage. Stocks with buybacks in Q1 of this year have been trending down and have fallen more than the market.

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The level of borrowing to fund buybacks is as high as it was in 2007-08 at the peak of the previous cycle. Needless to say, that did not turn out well for companies with too much leverage.  Investors should be short companies that have increased their leverage to buy back shares and give special dividends.  As credit spreads rise, the tide has turned, and investors are now starting to punish indebted companies.

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