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TheStreet Open House

The Only Way You Should Be Investing in Stocks Right Now

Stocks in this article: BIIBHSICHLMDRX

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

By David Sterman

NEW YORK ( StreetAuthority) -- What the heck is going on with this market? On two occasions this week, the major indices opened sharply lower and then clawed back higher as the trading session wore on. From hour to hour, the bears -- who fear a spreading European contagion, and the market bulls and who've been digesting solid recent quarterly profits, are wrestling for control of the market.

My take: The risks that could trigger a market pullback remain formidable, and I don't want to touch stocks that don't have some form of downside protection. This protection can come in many forms, from a bulletproof balance sheet to a history of solid, recurring cash flow.

I also like companies that are prepared to defend their stock. The companies I discuss below have recently announced major stock buyback plans, and in a market slump, they'd be active buyers at a time when few friends can be found. Just as important, any market swoon that does affect these stocks will mean more bang for the buyback buck. In some instances, they may have a chance to sharply lower the number of shares outstanding, which would set the stage for solidly higher earnings per share (EPS) in the future.

I've compiled a list of 19 companies that have made buyback announcements since the second quarter began. And their reasons to pursue a buyback now are numerous. Getting to the heart of why they are buying back shares is the key behind seeing whether they represent real value.

Not for Me

As a personal rule of thumb, I never like companies that look to buy back shares unless the forward price-to-earnings ratio is well below the market average. The only exception: if the near-term P/E ratios fail to represent what kind of earnings power a company can eventually have.

Biotech firm Biogen-Idec (BIIB) and dental supplies distributor Henry Schein (HSIC) aren't trying to bring attention to a lagging stock -- each trades near its 52-week high. Instead, they simply don't know what to do with their excess cash. I think these companies would be far better off holding tight -- let cash build higher and buy back shares some time down the road when they've fallen sharply from their highs.

A Previous Favorite

Hecla Mining (HL) is a different story. I've recently written quite a bit about this silver miner. As I noted in this article, if the company can keep its promise that a major shuttered mine will come back online in about eight months, then 2013 results will be far better. The company is using roughly one-third of its $280 million cash balance to buy back stock now, in anticipation of a better outlook, and a higher stock price, in the future.

The Long Slog Back to Relevance

In a similar vein, health care information provider Allscripts (MDRX) is currently suffering from a botched merger, which I previously discussed in this article.

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