ORLY- A "Cannibal" Stock that You Should Consider

A Cannibal is a business that “eats” or buys back its shares. They can be very attractive investments. The reasoning? In the long run, stocks always follow Earnings Per Share (EPS). Let’s take a look at O’Reilly Automotive Inc. (ORLY) as an example, says Pieter Slegers, editor of Compounding Quality.

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Since EPS = Earnings / Total Shares Outstanding, the only ways to improve EPS are to grow earnings or reduce the total shares outstanding. A great cannibal does both. Look at ORLY.A graph with green and blue bars AI-generated content may be incorrect.

This is the kind of chart I dream about at night. O’Reilly is buying back its shares while increasing net income at the same time. The result? An average return of 20.2% over the past 10 years. This means $10,000 invested in O’Reilly would now be worth $62,900.

But what if the total shares outstanding would increase? That’s exactly what Stock-Based Compensation (SBC) does. As the name suggests, SBC is compensation based on stocks. It allows companies to pay employees with stock instead of cash.

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The problem with this is dilution. When more shares are issued, your ownership stake shrinks. To avoid too much dilution, we always use these two rules:

• Stock-Based Compensation as a percentage of net income should be lower than 10%
• Avg. SBC as a percentage of net income past five years should be lower than 10%, too

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