Aggressive buybacks are giving some companies an edge, Jim Cramer says

As buybacks slow across the market, CNBC’s Jim Cramer on Tuesday told investors why he thinks generous share repurchasing is currently working in some companies’ favor, citing a note from Goldman Sachs analyst David Kostin.

“Kostin has some great news here: while buybacks have slowed, investors continue to reward companies that aggressively purchase their own shares,” he said. “And there’s your edge. Stocks with bountiful buybacks can do well here, in contrast to those that might not. It’s an edge. It’s not foolproof, but it’s certainly an arrow in your stock-picking quiver.”

Buybacks are integral to the market because they “drain the excess supply from the system,” Cramer said. For example, if there are a slew of shares added to the market through IPOs but not a lot of new money coming along with them, stocks will head lower, he continued. Buybacks help ease such a supply and demand problem, he said.

In a recent note, Kostin wrote that share repurchasing by S&P 500 companies was strong during the first half of the year — and even put the index on track for a record year of buybacks. But this growth has slowed during the second half of the year, he added, saying that many outfits are instead upping their capital expenditure.

Kostin also said that some companies with a history of consistent share count reduction are outperforming. He dubbed these names “buyback aristocrats,” or stocks that have reduced their share counts by at least 1% in at least nine of the past ten years.

Cramer suggested Kostin’s “buyback aristocrats” tend to outperform when the economy slows. He pointed to two of his favorites on this list that have been buying back 4% of their share count annually — Wells Fargo and Apple. He indicated that both companies’ generous buybacks demonstrate management’s confidence. He also used the iPhone maker’s “buyback aristocrat” status as another reason he believes investors should own the stock for the long term.

“You need fortitude to buy stocks and stick with them,” Cramer said. “Apple’s buyback helps that fortitude.”

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Disclaimer The CNBC Investing Club Charitable Trust owns shares of Wells Fargo and Apple.