7 Bold Buys by State Street

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Includes: AAPL, AIG, BLK, C, GM, HII, MSFT, NG, STT
by: Efsinvestment

Boston-based State Street Corporation (NYSE:STT) is one of the oldest U.S.-based financial services company. Established in 1792, State Street is a truly global institution with $21.527 trillion in assets under custody and administration and $2.01 trillion in assets under management. The company took a substantial hit in the financial crises, but was able to recover and get back on its feet. Last year, net profit was $1.540 billion. State Street reported EPS of $1 on $2.5 billion in revenue for the 2nd quarter of 2011. Operating basis EPS increased by 9% to $0.96 from $0.88 in the 1st quarter of 2011. Revenues increased by 6% in the same period.

As of the 2011 second quarter, State Street had a diversified portfolio of U.S. equities. Service companies constitute 17.59% of the holdings, followed by Technology stocks (16.14%) and Financials (15.37%). According to Edgar Online, State Street increased its ownership of 1600 stocks, while opening 137 new positions in the last quarter. I have examined the boldest 7 buys from a fundamental perspective (data obtained from Finviz/Morningstar and is current as of Aug.19):

Company Name

Ticker

Shares Held

% Change

% of TSO*

O-Metrix Score

Microsoft

MSFT

301.64 million

4.41%

3.60%

7.5

Blackrock

BLK

3.49 million

124.89%

2.59%

7.47

Citigroup

C

119 million

8.91%

4.08%

8.9

AIG

AIG

16.31 million

210%

0.86%

6.84

General Motors

GM

11.52 million

234.48%

0.77%

14.5

Apple

AAPL

35.24 million

1.34%

3.8%

7.25

Huntington Ingalls

HII

4.96 million

NEW

10.16%

N/A

Click to enlarge

*TSO: Total Share Ownership by State Street Corporation

Microsoft, the software giant, is one of the cheapest technology stocks in the market. State Street owns 301.64 million Microsoft shares, and increased its holdings by 4.41% in the last quarter. While this might seem like a small adjustment, considering the total share ownership of 3.6%, it is the largest transaction made by State Street Advisors. Also, State Street is the largest shareholder of Microsoft (3.6%), followed by the Capital Research Global Advisors (3.56%), and Vanguard (3.48%). As of August 19, Microsoft was trading with a low P/E ratio of 8.91 and a lower forward P/E ratio of 7.63. The company offers a yield of 2.66%, and has a low PEG ratio of 0.85. Analysts estimate an annualized EPS growth of 10.43% for the next five years, which is conservative given the 17.63% annualized EPS growth in the last five years. Based on these parameters, Microsoft has an O-Metrix score of 7.8. My FED+ fair value estimate range for Microsoft is $40-46. I believe Microsoft is deeply undervalued and at some point, sooner or later, the stock will catch up with the company.

Blackrock is one of the largest publicly owned investment management companies in the U.S. State Street owns 3.49 million shares, and increased its holdings by 124.89% in the last quarter. Total share ownership stands at 2.59%. As of Aug 19, the company had a market cap of $26.9 billion. It is trading at a low P/E ratio of 12.2, and a forward P/E ratio of 10.3. P/B ratio is 1.1, whereas P/S ratio is 3.1. 52-week trading range is $139-$210. With a closing price of $151, the stock is trading at the lower end of its trading range. Blackrock is one of the top dividend payers in the industry with a projected yield of 3.6%. Analysts estimate an annualized EPS growth of 13% for the next 5 years. That gives Blackrock an O-Metrix score of 7.47.

Citigroup shareholders made significant losses since January. The stock lost 10.32% in the last week, and 33.59% in the last month. State Street owns 119 million Citigroup shares and increased its holdings by 8.91% in the last quarter. Total share ownership stands at 4.08%. As of Aug 19, the stock was trading at a P/E ratio of 8.14, and a forward P/E ratio of 5.34. Analysts estimate an annualized EPS growth of 11.86% for the next 5 years. While it might seem too optimistic, it is possible—unless we observe a double-dip recession. Its 1 cent yield is funky, but the stock offers some deep value after losing 45% in the last 6 months. It has an O-Metrix score of 8.9.

American Insurance Group is going through radical structural transformations after receiving a dramatic bailout from the federal government. The company is shedding its non-core businesses, but still has a major presence in domestic property and life insurance areas. State Street owns 16.31 million AIG shares and increased its holdings by 210% in the last quarter. Total share ownership stands at 0.86%. As of June 19, the stock was trading at a low P/E ratio of 2.3 (due to asset sales), and a forward P/E ratio of 6.8. Analysts estimate 8% EPS growth for the next 5 years. AIG has a debt to equity ratio of 0.86, implying that it still has a high-risk profile. Nevertheless, the stock lost 54% since January, and it might offer great profits if the recovery keeps going on. Its O-Metrix score is 6.84.

Since its emergence from bankruptcy, General Motors is in a strong recovery. State Street owns 11.52 million shares and increased its holdings by 234.48% in the last quarter. Total share ownership stands at 0.77%. While the company is doing well, the stock has been heading south for a while. GM shares lost almost 40% since January. Unlike financial stocks, GM’s balance sheet does not have significant red flags. Its current ratio of 1.23 and debt-to-equity ratio of 0.29 are much better than financial stocks. As of Aug 19, the stock is trading with a low P/E ratio of 3.5, and a forward P/E ratio of 4.55. Analysts estimate an EPS growth of 11.6% for the next 5 years. Based on these estimations GM has an O-Metrix score of 14.5.

Apple, a Cramer favorite, is one of the most popular stocks among the institutions. State Street owns 35.24 million shares and increased its holdings by 1.34% in the last quarter. Total share ownership stands at 3.8%. Unlike most stocks in State Street’s buy list, Apple has been an outperformer. The stock returned 10.38% in a year, and 10.38% since January. The tech giant has a P/E ratio of 14.1, and a forward P/E ratio of 11.09, as of Aug 19. Analysts estimate an 18.2% annualized EPS growth for the next five years. Profit margin in 2010 was 23.5%, and it offers no dividend yield. Earnings increased by 122.15% this quarter, and 66.91% this year. ROA and ROE are 27.53% and 41.99%, respectively. 42 out of 51 analysts covering the company recommend buying. My fair value estimate for Apple is $430 per share. Apple is still a buy at this price. It has an O-Metrix score of 7.25.

Huntington Ingalls Industries is a new company to the stock market. Here is a description from the company website:

Huntington Ingalls Industries designs, builds and maintains nuclear and non-nuclear ships for the U.S. Navy and Coast Guard and provides after-market services for military ships around the globe. For more than a century, HII has built more ships in more ship classes than any other U.S. naval shipbuilder. Employing nearly 38,000 in Virginia, Mississippi, Louisiana and California, its primary business divisions are Newport News Shipbuilding and Ingalls Shipbuilding.

Huntington is a recent spin-off from Northrop Grumman (NYSEMKT:NG). The spinoff was approved in last March. Northrop Grumman shareholders received common stocks in the shipbuilding unit. Thus, it is highly likely that State Street acquired these shares during the spin-off process. The stock lost 25% since April. According to David Einhorn’s recent SEC filing, Greenlight Capital has taken a 5.1% stake in the company.
Disclosure: I am long MSFT, AAPL.