PKW - PKW: Seemingly Robust Buyback-Focused Strategy But Soft Performance

2024-07-15 23:43:27 ET

Summary

• PKW's strategy is focused on U.S. companies that are executing share repurchase programs.
• PKW's portfolio has a value tilt. It has an adjusted EY higher than that of IVV. Its quality is comparatively strong, but its growth characteristics are lagging.
• With a few robust years in the books, PKW was nonetheless unable to consistently outperform IVV and a few peers.
• Owing to its performance nuances, the factor mix that is not confidently ahead of that of IVV, the expense ratio of 62 bps, and because there is no downside catalyst strong enough, I believe PKW deserves a Hold rating.

At first glance, in the universe of countless investment strategies, sticking with companies that are consistently repurchasing their shares makes perfect sense. First, this is an approach that is not overcomplicated and thus potentially lucrative, as too much sophistication frequently results in untimely trades, elevated turnover, and gains missed. Second, fundamentals-wise, cash flows directed to buybacks indicate financial soundness and efficiency (i.e., a company has a surplus it can use to reward its shareholders instead of, for example, covering burdensome financing expenses, as its capital structure is healthy), even though this assumption has a few limitations to be addressed later. Anyway, a lower share count translates into better per-share metrics, be it earnings or free cash flow, thus opening the door for improving relative valuation and more capital appreciation going forward. So, at first blush, it seems buyback-centered portfolios are a treasure trove of pure alpha. Yet the reality is a far cry from this....

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