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Stockpickr: The Top 10 Buyback Stocks

James Altucher

In Jim Cramer's latest book, Mad Money: Watch TV, Get Rich, he mentions that a good metric for purchasing stocks is to find companies that have been buying back as many of their shares as they can.

This indicates the companies believe their own stock is cheap, and that they can increase their earnings per share substantially by reducing the supply of shares on the market.

We have set up a portfolio of my top 10 buybacks stocks called Mad Money Buybacks, which tracks companies that have not only announced significant buybacks in the future, but have also bought back significant shares over the past year.

No. 1 on the list is IBMIBM.

A major criticism of share buybacks is that they are just used to counterbalance the increase in shares that results from giving employees stock options. However, IBM actually decreased its shares significantly last year because of its buyback. Shares outstanding at the end of 2006 were 1.6 billion, down 4.6% from the year-ago period. IBM bought back 97 million shares during the year, and has plans to continue buying back shares.

IBM has been slowly buying back its company ever since 1995, having bought back 1.2 billion shares since then. And it has made an average of 50% on every purchase, given that the average price of its stock is $62.

What I find intriguing about IBM is that among its large shareholders is Intel Capital, which invests all of Intel'sINTC money. Certainly Intel has some insight into who is buying what in technology.

Additionally, super hedge fund Citadel is a buyer of IBM. And if you believe IBM is just about mainframes and "old" technology, it's interesting to note that the PowerShares Nanotech ETF is also a shareholder.

IBM trades at only 13 times 2007 expected earnings. The company is buying back stock hand over fist and has a 30% return on equity, meaning that for every additional dollar it puts to work, it generates 30 cents in earnings -- a smart way to allocate its capital. I believe IBM will hit $130-$140 within the next year.

Next on the list is DisneyDIS. The big news for Disney in 2006 was its multibillion-dollar merger with animation company Pixar, but the real highlight for me was the company's sheer domination of television and music over the past year.

Two weeks ago, three of the top 10 shows on all of cable television were all repeats of the Disney Channel original movie Jump In. The original showing of the movie came in at No. 1. At No. 2 was the show Cory in the House, which aired right before Jump In.

Meanwhile, the album for Jump In was one of the top-selling music albums, and the album based on the Disney Channel hit for 2006, High School Musical, was the No. 1 selling album in 2006. Disney is on fire with "tweeners," who have been viewed as a promising demographic on Wall Street. Disney has the formula down, and we'll see the numbers this year for it.

In terms of share repurchases, Disney bought back 243 million shares of stock in 2006 for approximately $6.9 billion. In 2005, the company bought back 91 million shares for $2.4 billion. The company now has authorization to buy back an additional 206 million shares.

Disney has also committed to buying back enough shares to keep its float even with where it was before buying Pixar, which was purchased for stock. The company trades for 10 times cash flows, and has fought off suitors such as ComcastCMCSA.

Disney could potentially hit $40 this year, and I'm not the only one who believes so. Value investors such as Prince Al-Waleed and Al Frank Asset Management also own shares.

For more of the stocks on our Mad Money Buybacks list, click here.

Stockpickr tip of the day: In addition to the Mad Money Buyback list, we also keep track of the top stock buybacks announced each week. For instance, this past week AlcoaAAsaid it would buy back 10% of its outstanding shares over the next three years. CVSCVS also announced a 150 million-share buyback plan that will commence once its merger with CaremarkCMX closes.

So these definitely are stocks that could find their way to the Mad Money Buyback list eventually, which we at Stockpickr intend to update on a regular basis.