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Goldman Sachs (NYSE:GS) is a leading U.S. investment bank offering investment banking, investment management services, and other financial services. I first bought Goldman Sachs, JPMorgan (NYSE:JPM), Citigroup (NYSE:C), Bank of America (NYSE:BAC), and AIG (NYSE:AIG) in 2009 and added to my positions throughout the last three years almost on a constant basis. I appreciate it when stocks fall based on unsubstantiated rumors or a changing sentiment. GS had been at the forefront of criticism regarding its role before and during the financial crisis.

If investors strictly look at the fundamentals and the market-assigned valuation, and ignore the surrounding noise, they will find that GS is deeply undervalued -- both absolutely and compared to its historical valuation. The company hit a 52-week high at $139 and came down substantially, recently quoting at just $94 -- which is a fall of over 30%. Is this justified? In my opinion, absolutely not.

The company holds leading market positions in investment banking and asset management. GS operates profitably with margins above 10% (net margin) and has achieved decent growth rates in book value during normalized times. And that is exactly what investors disregard about GS and many other financial stocks: We need to value companies based on normalized earnings -- temporary setbacks that are the result of the volatility of its business should not influence the valuation of the company.

GS has historically traded (before the financial crisis) with a P/B of 2. Currently, the company trades at only 65% of book value and 7.5 times earnings. This is dirt cheap. I cannot see any argument whatsoever that would justify taking 30% out of the market capitalization in a matter of month -- a more likely explanation would be the usual investor overreaction to news events from Europe that are blown out of proportion.

The company's book value per share is growing and it operates profitably, has a good reputation with clients (Berkowitz and Buffett attest to this), and have a pretty consistent earnings track record. In addition, the stock price has touched the lower support level at just above $90. In my opinion, the stock is dramatically undervalued and I am going to continue to add to my existing position.

High price targets are usually viewed with reservation. Considering that GS has traded at 2 times book value in the past in a more normal environment, there is no reason why the forces of mean reversion should not act in favor of GS shareholders. Given that GS trades at 0.65 times book value at $94, the stock has tremendous upside to reach its intrinsic value. I do have a personal price target of $200 on the stock -- even then the company would only trade at 1.55 times book value, giving even more room for growth. Also, investors might find this article from SumZero about GS interesting, which basically comes to the same conclusion.

Regulation and negative press coverage are the dominant short-term risks associated with an investment in GS. Investors who are heavily invested in financials should pay attention to increases in correlation risk when the sector as a whole comes under fire. Overall, I consider the risk/reward tradeoff for an investment in GS very favorable, and I will use pullbacks to add to my position.

Source: Why Goldman Sachs Is Worth $200 A Share