Stock Shrinkage

Stock Outstanding Shrinks By 3%

In 2006, between private equity and share repurchases by US corporations, the amount of stock outstanding declined by a good chunk in 2006.

In a newsletter released this morning by investment strategist and portfolio Don Hays of Hays Advisory, there was $400 billion in cash takeovers this year by private equity and corporate mergers and acquisitions. In addition, there was over $600 billion of share repurchases.

This adds up to 3% shrinkage in the supply of stock available for purchase.There could be a lot more of this in 2007 as a whole host of US companies are generating a lot of excess cash that management will need to put to work. Home Depot (HD) is the poster-child stock for excess cash generation and share buybacks.

A good investment approach for 2007 might be to find companies like Home Depot with little debt that generates a lot of free cash flow and can afford big stock buy backs. Sooner or later demand will outstrip supply and drive stocks with these characteristics higher.