Stock of the Week
NYSE Symbol: GS
Industry: Investment Banking
Price as of 10/28: $161.45
The markets keep chugging along with all the major averages up 20% year to date. Third quarter earnings have not been stellar, but investors don't seem to mind pushing most of the major averages to all-time highs. With the recent run up in the averages it wouldn't be inconceivable to see another correction, but the corrections have been short lived and gobbled up with fresh money as investors shed bond funds and allocate inflows to equity funds looking ahead to more quantitative easing and better economic growth and earnings next year. The financials remain one of the best performing sectors as the banks keep improving their balance sheets. This week, we'll highlight a financial underperforming the sector which recently was added to the Dow Jones Industrial Average. The stock of the week is Goldman Sachs. Goldman has long been an scapegoat for the excesses of Wall Street. The stock jumped dramatically following the addition to the Dow, but a recent pullback follow earnings may be providing a buying opportunity. Goldman trades for only 10 times earnings and just above its book value. It won't take much of an earnings beat or multiple expansion to allow Goldman to outperform the sector and the broader markets. Two recent updates gave price targets of $181 and $184 a share for Goldman's shares.
Back on October 17th, Goldman Sachs easily beat earnings estimates by 45 cents even as revenue fell 19.5% year over year to $6.72 billion. The beat in earnings estimates was helped by a 25% drop in operating expenses. The third quarter's results reflected a period of slow client activity," said Lloyd C. Blankfein, Chairman and Chief Executive Officer. "Still, we saw various signs that our clients are prepared to act on significant transactions and we believe that the firm is well positioned to help our clients accomplish their objectives. As longer term U.S. budget issues are resolved, we could see an improvement in corporate and investor sentiment that would help lay the basis for a more sustained recovery." The CEO and investors are looking forward to the fourth quarter and first quarter which are typically strong quarters for Goldman. An improvement in earnings could push Goldman out of its recent trading range.
In the meantime, Goldman remains one of the cheapest financials and Dow components. Currently, the stock trades for 10.5 times earnings, 2 times sales, and 1.07 times book of $153.58. The Tier 1 capital ratio rose to 16.3% and the firm's Tier 1 common ratio rose to 14.2% as of September 30, 2013, up from 15.6% and 13.5%, respectively, as of June 30, 2013. Level 3 assets were $42 billion as of September 30, 2013, compared with $43 billion as of June 30, 2013, and represented 4.5% of total assets. As mentioned, the stock has been in a tight range since May. A strong fourth quarter could push Goldman Sachs out of its range moving back toward all-time highs. Goldman Sachs Group recently increased the firm's quarterly dividend to $0.55 per common share from $0.50 per common share boosting the yield to a modest 1.4%.