Stock Thoughts: Goldman Sachs
February 17th, 2008 by Grant in: Banking, Finance, Stock ThoughtsGoldman Sachs Group, Inc. (GS: chart, web, Y!) is in the business of providing investment banking, and investment management services, primarily to corporations and financial institutions.
Goldman has been one of the few big investment banking and financial services firms that has actually held up well through the the fallout of the credit crisis and the housing slump. It’s low involvement in small residential mortgages and favorable short trades among the rest of the sector has worked in its favor.
The black sheep mentality compared to the rest of the sector has held the stock price around $200, and it even saw $250 per share back at the end of October.
Is the other shoe about to fall?
Goldman has insulated itself against residential mortgage problems, but it does have some hefty exposure to corporate debt; a topic that has yet to make its way into the headlines, but fear it will has dragged GS down considerably.
Goldman has been on the receiving end of some critical analyst reports during the last week, all conveying the fear that the company will miss earnings in mid March.
Analyst Jeff Harte of Sandler O’Neill said Goldman’s share price will likely be hit harder than its competitors’ since it has been trading at a “considerable premium over peers for the firm’s apparent ability to outperform in a difficult environment.”
The day before, Deutsche Bank analyst Mike Mayo said he expected Goldman to bring in only $2.63 per share in the first quarter, down from $4.64 per share. He expects Goldman to take a nearly $3.5 billion writedown due to leverage loans and other investments.
Earlier this month, Meredith Whitney of Oppenheimer downgraded Goldman to perform, from outperform, citing the 40% premium its shares were trading at compared with its peers. -Source
The earliest downgrade by Meredith Whitney requires some clarification however:
“Goldman’s franchise remains well ahead of its peers with respect to market share but most importantly execution, and none of that has changed, in our opinion,” she writes. “We simply believe there is more probability of multiple contraction than multiple expansion in the current environment of weak/low margin capital market conditions.” -Source
I tend to agree with her. Goldman is probably the smartest and most savvy of the big boys on Wall Street. They’ve avoided the most volatile hot spots in the financial sector, and bet against their peers when thing really went south in the credit sector.
I’m looking to pick up some Goldman Sachs, but I think I’ll have to wait till it finds a bottom. I agree with Ms. Whitney that the premium in price has put a target on the companies back, and the reaction to any speculative bad news will be grounds for over reaction.
It will be interesting to see how the stock fairs after earnings, and I think we’ll gain some insight into whether the second shoe representing corporate credit problems will bear the weight of a work boot or a flimsy flip-flop.
How well will Goldman weather the second front in the credit storm?
Does GS make for a good buy here?
Tags: Credit | Goldman Sachs | housing | investment banking
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February 17th, 2008 at 3:31 pm
Goldman may indeed have more exposure to bad credit issues than investors know of, however I’ve been buying shares here and there all the way from 205 and am not worried at all. Goldman is the Warren Buffett of the investment banking and trading world: power and money is what makes them the best. Example, their commodity index, GSCI, rolls every month, rolling expiring contracts into the next months. Every commodity trader knows about the roll and knows when the roll period occurs, it’s stated in the GSCI prospectus. But the way they spread their orders out amongst different brokers and firms is truly an art, making it pretty much impossible to front run the roll. But here’s the kicker, because they’re Goldman, the price at which they roll their contracts isn’t what shows up on their statements, it’s wherever the contract settles for the day. So, people wonder how they can make money off a ‘tracking index’, that’s how. Over the next 4-6 months I would like for GS to be approximately 30-40% of my portfolio.
Lastly, I use GS as an indicator for my active trading….if GS is trading down and starts rally aggressively, I do not want to be short the overall market!
February 17th, 2008 at 7:02 pm
Wow, 30-40% of your overall portfolio, Winston?
You must have some insight as to where GS is going. Where do you plan on selling it?
February 17th, 2008 at 8:37 pm
40 may be too agressive, but will continue to evaluate as information comes out and markets continue to play out. Unlike you, I’m not trying to pick a bottom in this stuff. For all I know it may go to 100 before it goes back to 250, but I’ll be buying incrementally should it continue to selloff. Should it begin to rally I will buy dips. My first target will be it’s high of 250, then 300, then a trailing stop. So far I’m down about 7% on the position, however my preliminary outlook for this is atleast one year, if not 3-5. This is my exposure to the beaten down financial sector, even if it falls more in line of a broker/i-bank.
Furthering my full disclosure, primarily because I really don’t care what people think of my investing philosophy, I’ve got about 25% in ADM which I’m up 25% and have no plans of selling, only adding to; about 20% in PVX, which I’ll be reducing if it continues towards $12; 10% in GHI, a high-yield emerging market bond fund, which I would like to add to on dips; 10% in BMY which I’m down about 15% and no plans of adding to, only liquidating on a move back up to recent highs of 28-30; 12% in GS, which as previously stated I’ll add to. The rest is in cash and Treasury funds. Frankly I would like to be a bit more diversified, have contemplated adding a tech, but for the moment I think my allocation is fine….
February 17th, 2008 at 8:44 pm
Not bad, Winston.
You mentioned Treasury funds. What does a guy need to look for in treasury funds right now?
February 17th, 2008 at 8:53 pm
Awesome discussion going on here. I too am bullish on Goldman and I think they’ll weather this storm dandily.
Seems like Winston has a good handle on things. Winston, what don’t you like about Bristol?
Grant, I think this is a fine place to pick up some GS, but buy in small chunks. mM
February 17th, 2008 at 8:56 pm
gs will be ok in long run, but speculation will drive this down further. if it drops below $170 in the next week, buy it. remember, the problems start with the individual loans first, and corporate notes are second to follow… just wait.
February 18th, 2008 at 10:41 am
From what I hear GS has more exposure to corporate and commercial debt (which is good because liquidity isn’t as big of an issue as it is in individual), with little on the individual side. However, as aggresively and creatively as those individual loans were packaged together it would be hard to tell, probably even for GS, if there’s big exposure there. Buying in small chunks is the key I think.
I don’t like Bristol because I think they’ll get whacked too hard from the generics. They’re management has also been sketchy. Everyone seems to be saying that the drug sector will outperform in ‘08, I’m wondering when it’s going to start kicking in….if I had more cash I’d be buying small chunks of TEVA against BMY, buying aggressively above 50.01.