Goldman's a Buy Heading Into Earnings

With financial markets furthering their downwards trend this past week, the financial sector has been sold off indiscriminately. The Financial Sector ETF (XLF) has fallen from 30 to a little over 24 in the month of February alone. While there is no doubt that the financial situation has been deteriorating for the past several months, this does not mean that some companies have been averting the crisis, or at least partially doing so. One such company is Goldman Sachs (GS) which will report earnings March 18th, 2008.

Currently trading at 6.4 times earnings, Goldman Sachs is cheaper that the rest of the Financial Sector which trades at 15.1 times earnings, and the rest of the Investment Services Sector which trades at 17.7 times earnings. With earnings per share increasing from $4.93 to $7.01 from Q2 to Q4 of 2007, Goldman has not completely averted the credit crisis, and is poised for a decline in earnings. The mean estimate for the first quarter of 2008 is $3.30 per share.

While the projected earnings decline is significant, it does not justify the position that it currently trades at, 36% off its 52-week high. Though EPS growth is poor, quarterly sales growth still remains as a positive attribute of the company despite the difficult credit situation.

Throughout this situation, Goldman Sachs has been able to maintain the fundamentals that have kept it the leading Investment Bank throughout this situation. The profit margin of the company has remained at 25.22% through the fourth quarter of 2007. While almost every investment bank has had to write down billions in assets, Goldman has yet to do so.

Technical analysis of Goldman's 1-year chart indicates that the company is currently a buying opportunity. When the sub-prime crisis first began to unravel in the summer of 2007, Goldman established a price bottom of 160. After bouncing off of this low, the stock reached an all time-high of 254. However, it promptly fell back to the resistance level of 160.

At the moment, the stock has traded on high volume off of this resistance, implying that the 160 price level will hold. The 160 price bottom is further supported by the Money Flow Index (14) which is at 30, and trending upwards, at this price. Both the fast and slow stochastic models further indicate that Goldman Sachs is oversold at this level.

Both fundamental and technical analysis demonstrates that Goldman Sachs is at a promising entry point. Hitting the 160 price bottom for the second time, the stock is poised for a bounce into its first quarter earnings announcement in the middle of March 2008.

While there are many bullish indicators for Goldman at this point, much of the future of the share prices lies in the general market direction that ensues. With both the Dow Jones Industrial Average and S&P 500 both hitting 52-week lows this past week, the index floor has been broken and the next point of support may be hard to find.

While the current situation is volatile and unpredictable, there are still ways to take advantages of Goldman Sachs into earnings. One could both go long Goldman and protect the investment with March 08 puts at the 160 strike. This would allow the investor to take advantage of the large upside potential, while being protected to any downside. A second strategy to own Goldman is to straddle the stock at 160, with March 08 calls and puts at this level. This will provide the investor with both the upside and downside protection, like the former strategy.

Disclosure: None

Comments

[Sergey Mask...:]

I'd have to disagree because other financial stock like Merrill Lynch has already broken the support and are heading lower. And today we have Goldman to break through 160 on the down side! The market in general looks like it hasn't made the bottom and financial stocks are the worst performers at the moment.

2008 Mar 10 03:57 PM

[Jason Liu:]

Around 1/4 of GS' originates from investment banking. With the markets the way they are currently, that business at least will definitely take a hit.
Furthermore while Goldman Sachs hasn't had any write downs, there have been fears that some of the SIVs may have to be written off this quarter. That along with how well GS' traders have done, accountable for 2/3 of their revenue, will decide how well GS does this quarter.

I'm also of the opinion that you can't really use P/E ratios to value financial stocks right now due to the absurd write downs taken. These non-recurring charges artificially inflate the P/E ratio and make the banks seem a lot more expensive than they really are.

2008 Mar 10 06:22 PM

[hook:]

it's less than pointless to fundamentally analyze brokers right now. all of these companies make money because they can borrow money and borrowing money has become a huge issue in that it's not cheap anymore. goldman is a sell as are all other brokers

2008 Mar 10 07:49 PM

[User 152666:]

Excellent. The crowd is always wrong.

Long GS.

2008 Mar 16 11:39 AM