Buyback Bets in Banking

07/25/2013 9:00 am EST

Focus: STOCKS

David Fried

Editor, The Buyback Letter

Our Buyback Portfolio is beating the S&P 500 by more than 82% since its inception in August 2000. Among our latest recommendations are two financial stocks—Goldman Sachs Group and State Street Corp. says David Fried of The Buyback Letter.

We have bought shares of Goldman Sachs Group (GS) a few times over the years, in 2005, 2006, and 2007.

(GS), of course, is a behemoth in investment banking, trading, and asset management that provides a wide range of services worldwide to corporations, financial institutions, governments, and high-net-worth individuals.

After 144 years of operation, it is the gold standard on Wall Street. It was ranked #93 on Fortune magazine's 2013 100 Best Companies to Work For, and #39 on the magazine's 2012 list of World's Most Admired Companies.

The company has a market cap of about $75 billion, with strengths analysts see in several areas—solid stock price performance, growth in earnings per share, attractive valuation levels, increase in net income, and expanding profit margins.

First quarter net revenues were $10.09 billion, and net earnings were $2.26 billion. It remained top of the heap in investment banking—ranking first (year-to-date) in worldwide completed mergers and acquisitions, and first in worldwide equity and equity-related offerings, common stock offerings and IPOs. Management has reduced shares outstanding by 6.8% in the last 12 months.

State Street Corporation (STT) is one of the world's leading providers of financial services to institutional investors including investment servicing, investment management, and investment research and trading.

With $25.4 trillion in assets under custody and administration, and $2.2 trillion in assets under management (as of March 31, 2013), State Street operates in more than 100 geographic markets and employs 29,460 worldwide.

STT is a trust bank which provides securities services to institutional investors and back-end services to investment managers.

Trust banks are different from other commercial big banks because they do very little lending, and thus have minimum exposure to credit risk. Mostly, they generate fee-based income compared to more fund-based income by commercial banks.

The stock recently hit a 52-week high; the market cap is $31 billion. In its most recent quarter, revenue for State Street was $2.47 billion, and adjusted operating EPS of $0.96, exceeded analysts' estimates by $0.03.

Analysts find STT's strengths in several areas—solid stock price performance, impressive record of earnings per share growth, attractive valuation levels, expanding profit margins and increase in net income. Management has reduced shares outstanding by 6.7% in the last 12 months.

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