Insider Selling, Loss Of Golden Workforce Make Us Bearish On Goldman Sachs

Sep.25.12 | About: Goldman Sachs (GS)

We reiterate our sell recommendation on Goldman Sachs (NYSE:GS), which we believe has lost its competitive advantage of being the most attractive employer in the U.S. financial sector. The bank is facing tremendous difficulty in handling its workforce. Besides shedding the workforce and slashing salaries, the bank has now suspended its prestigious two-year graduate program, depriving itself of fresh talent. Insider sentiments, as reflected by the most recent sell transactions, also support our bearish stance on the stock.

Human Resource Issues

Goldman Sachs has been long considered to have the most golden workforce in the industry. However, it seems like it has lost some of its gold as of late. The bank seems to be in trouble as far as human resource is concerned. Owing to tight rules and the sluggish and uneven economy, the bank is doing away with its historic two-year graduate program, in which junior analysts used to be hired; this was reported on September 14 by the Wall Street Journal. Furthermore, it was reported that analysts completing the said two year contract would not get any bonuses. Before the financial crisis, the size of this bonus was often equal to an analyst's full salary. These analysts used to put in long hours to climb up the corporate ladder, which is why Goldman Sachs' move will be a blow to junior analysts. Another reason for such a decision is that the bank's top management had become frustrated, as many of the graduates of the program were not staying with the bank after the completion of the two years.

Where the termination of the program will let the bank keep only those employees who are passionate about the field, it will also deprive the bank of hiring fresh graduates who are generally more enthusiastic about the Banking Industry.

Insider Sentiments

In an earlier report on Goldman Sachs, we were bearish on the stock, and noted that besides shedding its workforce, the bank was also accused by its own workforce of losing its moral fiber. The negative insider sentiments also support our bearish stance. The following table shows the most recent sell transactions by insiders. In August and July of the current year, insiders sold $2.5 million and $1.5 million worth of shares. The sell transactions reflect the lack of insider confidence on the bank's future growth and its stock price.

Click to enlarge

Source: CNBC

Recent Financial Performance

The bank posted one of its lowest first half performances since 2005. Going forward, the bank is expected to witness a decline in its profits owing to the pressure from a sluggish U.S. economy. The bank's second quarter earnings also confirm our bearish stance on the stock. Even though results were above what analysts had expected, they were still below the previous quarter's performance. Profits for 2Q2012 were 11% below the second quarter of the previous year.

Valuations

GS trades at a discount of 17% to its book value, against a discount of 45% for Morgan Stanley (NYSE:MS) and 16% for JPMorgan (NYSE:JPM).

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

Business relationship disclosure: The article has been written by Qineqt's Financials Analyst. Qineqt is not receiving compensation for it (other than from Seeking Alpha). Qineqt has no business relationship with any company whose stock is mentioned in this article.