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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Goldman Sachs

August 25th 2015

Goldman Sachs
NYSE Symbol: GS
Industry: Investment Banking
Price as of 8/25: $178.22

After consolidating for 6 months, the major averages broke out to the downside. In just three days, the major averages dropped 9% or more before rebounding today. All the major averages are in the red for the year registering their first 10% correction since 2012. The culprits remain the US strong dollar, China and their slowing growth putting fears of a global recession in investor's hearts. In the coming weeks we should rebound. But there is a real possibility of rolling over again in September or October. In hindsight, yesterday provided a great trading opportunity in most blue chip companies some trading at levels not seen since last year. A number of stocks traded below 10 times earnings including Apple, most large cap banks, and the airlines.  If you missed it don't worry, you may get another opportunity in the coming weeks. At this point it's a good time to make a list of stocks you'd like to buy and see if we get another opportunity to buy them at lower levels. The sectors to avoid remain the energy and commodity space. If the price of oil remains low in the coming months we may see more bankruptcies and equity secondary offerings diluting shareholders. The best stocks to buy are the ones getting dragged down for no reason or the ones that will benefit from the selloff.  Apple and Delta have share buyback plans in place to buy back at least 20% of their float which should boost earnings per share this quarter. The banks should also benefit from the correction and a hike in interest rates. This week we'll feature the largest investment bank in the country, Goldman Sachs. After a tough January, Goldman and the rest of the banks have performed well in 2015 as earnings continue to recover from the financial crisis. However since June, Goldman is in a 16% correction now trading for less than 10 times earnings. Any further pullback will only provide a better buying opportunity for a stock with a $169 a share book value.  Something tells me Goldman will figure out how to make money from the slowdown in China and and other regions.

Back in the middle of July, Goldman Sachs reported better than expected earnings. The company beats earnings estimates by 81 cents or $4.75 per share. Revenue fell 0.6% year/year to $9.07 billion vs estimates of $8.78 billion consensus. The quarter wasn't all rosy. During the quarter the firm recorded $1.45 billion in net provisions for mortgage-related litigation and regulatory matters and bond trading was weaker than expected.  These provisions reduced diluted earnings per common share by $2.77, and reduced annualized ROE 6.7. Investment banking net revenues came in at $2.02 billion, 13% higher y/y and 6% higher quarter or quarter. Net revenues in Financial Advisory were $821 million, 62% higher y/y, reflecting an increase in industry-wide completed mergers and acquisitions. Goldman ranked No. 1 in global mergers and acquisitions. Net revenues in Underwriting were $1.20 billion, 6% lower y/y due to lower net revenues in debt underwriting, reflecting lower leveraged finance activity. Net revenues in equity underwriting were higher, including an increase in net revenues from secondary offerings. Goldman has done a good job of diversifying away from trading activities and the investment banking division which used to be 40% of their business. Now Goldman provides more consistent earnings through fees and other reoccurring revenue streams.

With the recent weakness, Goldman now trades for less than 10 times earnings. Currently the stock trades for 10 times 2015 earnings, 9 times 2016 earnings, 2.2 times sales, and 1.1 times book value of $169 a share.  There aren't many cheaper stocks in the market. UBS recently upgraded Goldman Sachs with a price target of $220. The analyst conceded that Asia could be a near term headwind but they also believe the liberalization of markets in that region will be a positive long term trend. UBS believes Goldman is also well positioned to gain share as some of the large European competitors pull back. All in all, Goldman is well positioned and priced with good risk reward for future growth.