Goldman Sachs (GS) remains a phenomenal investment because of its fastest growing division (investing & lending), the stabilization of the regulatory environment, along with improving economic conditions.
Goldman Sachs will be one of the best performing investment banks in 2013 due to the stellar performance in its investing & lending division.
The investing & lending division grew its net revenues by 175% in 2012. Goldman Sachs is exceptional at investing capital into unique business opportunities and ventures. Goldman Sachs will sustain high growth-rates in this division, this is the primary upside catalyst in the stock.
Goldman Sachs feels that it is well-capitalized and currently has a Tier 1 capital ratio of 16.7%. The Basel Committee on Banking Supervision has finalized the Basel III regulation for determining regulatory capital, and when fully phased in by 2019, will require a tier 1 common equity to risk-weighted assets of at least 7.0% for small banks. For bigger banks the equity to risk-weighted assets will be 8-10.5%. This implies that Goldman Sachs can use an additional 6.2% of tier 1 common equity capital to invest and generate higher yields on investment for shareholders.
The year-over-year revenue growth in its asset management division was 19%, Goldman Sachs is capable of producing triple digit returns for itself, so it is easy to imagine why its assets under management saw a sudden boost.
The elasticity rating of financial services is 0.56 (inelastic). This implies that the financial products Goldman Sachs markets will be sold at a premium, giving Goldman Sachs pricing power, and higher net profit margins.
Goldman Sachs reports assets at mark-to-market value; this was regulation that was imposed in order to improve liquidity by the FASB (Financial Accounting Standards Board) in 2009. By imposing this standard, Goldman Sachs is able to speculate on the value of securities, and able to record the paper gains without fully realizing them. This means - phenomenal yields, and a truer representation of how much money Goldman Sachs is able to make.
Goldman Sachs competes with Citigroup (C), Bank of America (BAC), JPMorgan Chase (JPM), Wells Fargo (WFC), Morgan Stanley (MS), Lloyds Banking (LYG), HSBC Holdings (HBC), BlackRock (BLK), Charles Schwab (SCHW), UBS AG (UBS), among many others.
Goldman Sachs bottomed out in 2012 at approximately $92.00 per share, and is currently trading at $141 per share. The company presents a lot of opportunity as it is breaking out of a symmetrical triangle formation; this is further backed by the fundamental price forecast.
Source: Chart from freestockcharts.com
The stock is trading above the 20-, 50-, and 200- Day Moving Average. The stock is in a confirmed up-trend (higher highs and higher lows), the up-trend further supports my buy-thesis, and the confirmed break above the symmetrical triangle formation will cause the stock to experience a sudden surge in valuation.
Notable support is $95.00, $115.00, and $125.00 per share. Notable resistance is $164.00, $175.00, and $190.00 per share.
Analysts on a consensus basis have exceptionally high expectations for the company going forward.
Past 5 Years (per annum)
Next 5 Years (per annum)
Price/Earnings (avg. for comparison categories)
PEG Ratio (avg. for comparison categories)
Source: Table and data from Yahoo Finance
Analysts on a consensus basis have a 5-year average growth rate forecast of 31.15% (based on the above table).
Source: Table and data from Yahoo Finance
The average surprise percentage is 36.5% above analyst forecasted earnings over the past four quarters (based on the above table).
Forecast and History
The EPS figure shows that throughout the 2003-2007 period, the company was able to grow earnings. Throughout 2007-2009 earnings contracted. 2009-2011 saw a massive decline in EPS due to various fines and losses from trading. The company has been able to recover its earnings in 2011 due to growth in its core businesses.
Source: Table created by Alex Cho, data from shareholder annual report
By observing the chart, we can conclude that the business is cyclical and is affected by macroeconomics. Therefore the largest risk factor to Goldman Sachs is the slowing of international gross domestic product growth, which translates into declining security values. So as long as the United States economy continues to grow, the company will generate reasonable returns over a 5-year time span based on the forecast below.
Source: Forecast and table by Alex Cho
By 2018, I anticipate the company to generate $36.24 in earnings per share. This is because of cost management, growth in its investing and lending business, along with improving economic outlook.
The forecast is proprietary, and below is a non-linear chart indicating the price of the stock over the next 5-years.
Source: Forecast and chart by Alex Cho
Below is a price chart incorporating the past 10 years and the next 6 years. Detailing 16 years in pricing based on my forecast and price history on December 31st of each year.
Goldman Sachs currently trades at $141.09. I have a price forecast of $195.53 for December 31st 2013. Generally undervalued stock will experience sudden rallies in order to fetch a reasonable premium relative to historic valuation, or book value. I factored that into my price forecast, making it an important component behind the sudden jump in stock valuation despite the gradual improvement in anticipated earnings.
Over the next twenty-four months, the stock is likely to appreciate from $141.09 to $195.53 per share. This implies 38.5% upside from current levels. The stock is in an up-trend, which further supports my investment thesis.
Investors should buy Goldman Sachs at $141.09 and sell at $195.53 in order to pocket short-term gains of 38% during 2013 or 2014.
The company is a decent investment for the long-term. I anticipate GS to deliver upon the price and earnings forecast despite the risk factors (competition, regulation, economic environment). Goldman Sachs' primary upside catalyst is improving economics, product development, and managing costs. I anticipate the company to deliver upon my forecasted price target of $416.38 by 2018. This implies a return of 195% by 2018. This is a phenomenal return for a financial company.
A higher yielding investment opportunity albeit having higher risk is to buy the Jan 17, 2015 calls at the $145.00 strike. The call premiums trade at $15.90. The price forecast for the end of 2014 is $227.44. The rate of return if the calls expire at $227.44 is 418.5%, the option will break even when the stock trades at $160.90.
The call premiums are cheap because investors who are short GS calls do not anticipate the stock to break out into new all-time highs, and that regulatory risk will keep the premium on growth muted. I don't anticipate this to happen, and the risk to reward ratio on the option strategy remains high. The high returns comes with moderate risk (5-year beta of 1.4)
Goldman Sachs has a market capitalization of $66.3 billion; the added liquidity makes this an investment opportunity appropriate for larger institutions that require added liquidity.
Investors should remain optimistic on Goldman Sachs because of growth, and return to historic valuations. I am strongly convinced that the stock will outperform in the financial space going into 2013, making it an appealing investment opportunity for those who are willing to take on the higher risk.
The conclusion remains simple: buy Goldman Sachs.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.