Buybacks signal bullishness

What is most spectacular about the buybacks announced this week is not just their size, but also that they are occurring in industries whose fundamentals are at a cyclical bottom or just beginning a cyclical upswing.

• Home Depot Inc (NYSE: HD) -- increased share buyback by $22.5 billion, roughly one-third of its market capitalization
• Expedia Inc (NASDAQ: EXPE) -- buying back 42% of its outstanding stock through a Dutch auction
• National Semiconductor Corporation (NYSE: NSM) -- last week increased its buyback to $2.5 billion, or 27% of its market cap.

TheStreet.com has an excellent chart on share buybacks announced during the last few months.

Home Depot is buying back stock while the housing construction market is still bottoming, Expedia just started reported good results earlier this year and National Semi said in its most recent conference call that the wireless semiconductor market is exiting an industry bottom.

Why is there so much cash available for these massive share buybacks? Huge returns on invested capital (ROIC) is the answer. US companies have done a great job earning their cost of capital. Even if companies do not grow revenue quickly, as has been the case with Home Depot, they generate massive free cash flow. The same can be said of Expedia and National Semi.

The massive buybacks being announced just as industry fundamentals are bottoming or beginning an upswing is a very bullish signal for these stocks.