Home Depot -- A quick 5% return

Home Depot just bought back 290 million shares. There is no surprise here as this has been in the works for months. And, it has been widely viewed as a positive move by the company. Nonetheless, its share price dropped 5% as a result of two phenomena – both very short term. Tomorrow, if not later today, HD’s price will recover and a quick 5% return can be made by even the most conservative investor.

The buyback of some 15% of its shares is expected to increase per share value of up to 15 cents for shareholders. But, the decline is the result, in part, because the price of the buyback ($37) was the low end of the offer and lower still than the price at the opening today. Investors who offered their shares were, obviously, disappointed. The second cause of the drop was that the company bought back some 40 million shares more than originally planned. This led to worry over the larger than anticipated numbers willing to sell at this time. On top of all this, index managers responded mechanically – and stupidly – to the reduced float.

The result – a very short term decline caused by concerns and actions of no meaning. The result, too, is a terrific opportunity to cash in and profit by this short term volatility.