Stock of the Week
NYSE Symbol: GS
Industry: Financial Services
Price as of 5/6: $141.46
Sell in May and go away seems to be working so far particularly for the commodity sector. Silver started the correction when higher margin requirements caused the speculators to take their profits spreading to the other commodities like oil and gold. The commodity stocks also got hit with selling pressure as money rotated into other sectors for protection. The dividend paying stocks have been performing great of late as money moves into those stocks seeking shelter. One sector that has underperformed for years, the financials, hopefully will benefit from the rotation out of commodities. The fundamentals continue to improve for the banks so much so that the government has allowed the big money center banks to hike their dividends in some cases dramatically. JP Morgan for example raised their dividend from 25 cents to a dollar for the full year, plus initiating a share buyback. The new buyback plans should provide downside protection for a number of these big banks. This week we'll feature the largest investment bank on Wall Street, Goldman Sachs. Goldman remains a well respected and envied firm on Wall Street, yet their stock is acting awful once again. This week the stock dropped to an eight month low even as their business and fundamentals continue to improve. The recent weakness is attributed to the guilty verdict of the insider trading case against Raj Rajaratnam. Now investors are nervous that an emboldened federal government will go after more Wall Street money managers or firms. Dick Bove downgraded Goldman's stock this week lowering his price target to $120 a share due to concerns about possible action from the Department of Justice. That price target is below Goldman's book value of $129 a share. Goldman is not a conservative investment, but the recent weakness is providing a great long term buying opportunity. Last week UBS upgraded the stock with a $200 price target. One of these analysts will be right.
Back in April, Goldman Sachs reported first quarter net income of $908 million or $1.56 a share after paying a $1.6 billion in dividends to Berkshire Hathaway redeeming Warren Buffett's preferred stock. Excluding the dividend, net income was $2.7 billion, or $4.38 a share easily beating estimates. Net revenue totaled $11.8 billion for the quarter, down from $12.8 billion in the first quarter of 2010, but beat estimates. The revenue upside was driven by better than expected investment banking, equity trading, and principal gains. Even including the charge and 9 million share buyback, the book value grew to $129.40 a share, up from $128.72 last quarter. The CEO, Lloyd Blankfein was pleased with the quarter seeing generally improving market and economic conditions. However, even though the earnings were good, the stock still declined.
The fundamentals of the company remain strong, but investors remain on the sidelines concerned about regulatory scrutiny and or litigation risk. Currently, Goldman Sachs' stock is trading for 10 times earnings, 7.3 times 2012 earnings, and 2 times sales. The stock also trades for 1.08 times book value of $129 a share. The stock provides a dividend, but a modest one of 1%. However the stock will go ex-dividend in two weeks for 35 cents a share. As mentioned, last week UBS upgraded the stock with a $200 price target. Oppenheimer also has a $200 price target. Friedman Billings Ramsey has a $190 price target while JMP Securities has a $183 price target. After looking at the earnings, the Ticonderoga analyst made comments that even with constant political and regulatory uncertainty, the stock should be trading close to 1.3 times book value or in a $165-170 price range. That's 18% higher from current levels. Short term, the stock may remain under pressure, but long term the stock has compelling upside potential.