Analyzing Goldman Sachs' Top Buys

| About: Goldman Sachs (GS)

Goldman Sachs (NYSE:GS) manages over $100 bn in equities primarily through its asset management subsidiary Goldman Sachs Asset Management. The firm manages the Goldman Sachs series of funds apart from other series of mutual funds and caters to individuals and institutions.

The following is a list of its top 10 buys in the last quarter, as released in its most recent 13F filing with the SEC.



Shares Held - 12/31/2010

Shares Held - 03/31/2011

Devon Energy Corporation




Google Inc








NetApp Inc




Cliffs Natural Resources Inc.




Boston Scientific Corporation




American Express Company




Valero Energy Corp




Praxair Inc




Hess Corporation




Here is my take on Goldman Sachs' top five buys by market value:

Devon Energy Corporation, together with its subsidiaries, engages in the acquisition, exploration, development and production of natural gas and oil in the United States and Canada.

My Take: Buy

DVN has positioned itself as a pure play North American on-shore oil and natural liquid gas (NGL) player. It has used the proceeds, $11 billion, from its divestures to pare down its debt and on stock buybacks and new lease acquisitions. North American on-shore production increased by 7% from a year ago, exceeding guidance. NGL production grew by 17%-19% resulting in a top line growth of 6%-8%. DVN is expected to complete its share repurchase program by the end of the year.

Google Inc has interests in Internet search, cloud computing and advertising technologies. Google hosts and develops a number of Internet-based services and products, and generates profit primarily from advertising through its AdWords program.

My Take: Buy

Google still maintains its supremacy as the lead search engine. It has 65.5% share of the U.S. market (Bing -14.1% and Yahoo 15.9%) and about 90% of the European market.. There has been a 10% increase year on year in explicit search queries at Google. First quarter results for 2011 were good. There was a 27% increase in revenue growth. Both revenue per click and number of clicks increased. There was a drop in EBIT margins of 2.7% to 32.7% due to an increase in headcount. Android is rapidly gaining share in smart phones (currently 36% of market share, up from 2% in Q1 2009). There is still room for growth in International markets.

There are some headwinds in Google’s electronic commerce venture. PayPal and Ebay (NASDAQ:EBAY) have filed suit against Google alleging that trade secrets of PayPal’s mobile payment system were stolen. The lawsuit has been filed on a day when Google launched its Google Wallet and Google Offers services that will incorporate coupons and discounts and payments at the time people buy things through the phone. This will not impact Google’s main growth driver, its search engine.

ConocoPhillips is currently the world's sixth largest OECD-listed integrated oil company by market value. It is engaged in exploration, production of oil and natural gas on a worldwide basis. It also has significant interests in refining and marketing of oil products and in chemicals. It is headquartered in Houston, Texas.

My Take: Underperform

ConocoPhillips is following the principle “shrink to grow." It is increasing divestures from $10 billion to $12-$17 billion. The asset sales have been profitable due to high oil prices. It is using the profits in a share buyback program. Although the asset sales are profitable, in the short term, its asset base is shrinking. Production is declining. Recent trouble in Libya has halted COP’s oil production in that region. The decline in production from the mature North American and North Sea oil fields were marginally offset by the increase in gas production in Qatar. Long term growth will be dependent on the exploration success in the next few years.

NetApp Inc provides enterprise storage and data management software and hardware products and services. The company provides solutions for storing, managing, protecting and archiving business data.

My Take: Buy

For its fiscal fourth quarter NetApp posted revenue of $1.428 billion, ahead of the Street consensus of $1.39 billion. Revenues were up 22% year on year. For the fiscal year, total revenue grew 30% and product revenue grew 41%. NetApp continues to strengthen its U.S.federal business as well as U.S. commercial. The Americas generated $805MM in revenue or 56% of total revenue (up 15% q/q and up 27% y/y). Included within the Americas segment, the U.S. public sector accounted for 16% of total revenue (up 43% q/q and up 73% y/y) as management believes virtualization and cloud remain top government priorities. EMEA revenue increased 7% q/q and up 15% y/y to $487MM, comprising 34% of total revenue. Asia Pacific increased 5% sequentially and up 21% y/y, accounting for 10% of total revenue within F4Q. The completion of the Engenio acquisition brings an entirely new set of market and channel expansion opportunities for NetApp.

Cliffs Natural Resources Inc is a mining company based in Cleveland, Ohio, with operations across North America and in international markets. It produces iron ore pellets, lump and fines iron ore and metallurgical coal products.

My Take: Good buy from long term perspective

The North American iron ore division produces 27 million tons of iron ore pellets annually, and this is almost 30% of the total annual production capacity in North America. The strong position of the division has helped in signing of long term supply contracts with some of the largest steel manufacturing companies in the world.

The acquisition of Consolidated Thompson’s Canadian Bloom Lake mine will initially boost the production of iron ore concentrates by 8 million tons. The acquisition will increase Cliffs’ geographical footprint, especially in Asia. Consolidated Thompson has a long term supply contract with Wuhan Iron and Steel, one of China’s biggest steel manufacturers. China’s economic growth is expected to pick up in the latter half of 2011, and an increase in demand is expected from Japan (reconstruction work after the earthquake).

For other companies in the Goldman Sachs’ top buy list, below are some of the specifics, including a brief description of the business and growth expectations:

Boston Scientific Corporation is a worldwide developer, manufacturer and marketer of medical devices that are used in a range of interventional medical specialties. The company has seven business groups: CRM, Cardiovascular, Electrophysiology, Endoscopy, Urology/Women’s Health, Neuromodulation, and Neurovascular. Boston’s EPS forecast for the current year is $0.39 and for the next year is $0.46. According to consensus estimates, its top line is expected to decline 1.10% in the current year and 1.60% next year.

American Express has four segments: U.S. Card Services, International Card Services, Global Commercial Services, and Global Network and Merchant Service. American Express’ EPS forecast for the current year is $3.82 and for the next year is $4.15. According to consensus estimates, its top line is expected to grow 6.30% in the current year and 7.30% in the next year.

Valero Energy Corporation is a North America’s independent petroleum refiner and marketer. Valero’s EPS forecast for the current year is $3.48 and for the next year is $3.75. According to consensus estimates, its top line is expected to grow 29.40% in the current year and 2.90% in the next year.

Praxair Inc is an industrial gas supplier in North and South America. Praxair’s primary products for its industrial gases business are atmospheric gases and process gases. Praxair’s EPS forecast for the current year is $5.46 and next year is $6.25. According to consensus estimates, its top line is expected to grow 10.40% in the current year and 9.30% next year.

Hess Corporation is a global integrated energy company that operates in two segments: Exploration and Production, and Marketing and Refining. Hess’ EPS forecast for the current year is $7.61 and next year is $8.31. According to consensus estimates, its top line is expected to grow 15.20% in the current year and 3.60% next year.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.