Does GS Recapitalization Indicate It's Time to Invest?

As the financial musical chairs continue to get shifted, we are now learning that Warren Buffett, who has been relatively silent (investment wise) until last week, is now beginning to see value in the markets (see WSJ article).

Is Buffett investing only in small regional banks, as some others are doing? No. Berkshire Hathaway (BRK.A) is taking a position in Goldman Sachs (GS), investing $5 billion in return for receiving perpetual preferred shares in Goldman. At the same time, Goldman will also be looking to do a stock offering to raise over $2 billion in additional capital.

This turn of events is significant, in my opinion, in that it signals a couple of important points. For one, by taking a sizable position in Goldman, the richest man in the world is indicating that the financials are in value territory, and that it is time to step up and take a position. This will certainly give a boost of confidence to other investors.

The move by Goldman also shows that companies themselves are willing to recapitalize, believing that the market is now stable enough to do so, or at least that there are government and Buffett-type backstops available if times get difficult. Given the recent restrictions on short sales, this also appears to be a good time to do a secondary given that the diluting effects of the offering are less likely to be punished by short sellers and the market.

Is volatility behind us, and is this a bottom? No, and probably not. Nonetheless, we may be finally reaching a point where leading companies in leading industries (and even non-leading industries) will finally begin to see their value reflected in the market place. This may not be a bottom, and financials will certainly still see volatile times ahead, but looking through the cloud of bankruptcy does allow potential opportunities to start appearing.

Disclosure: None

Comments

[Shiv Kapoor:]

I believe that it is a good time to invest in GS. But now that Berkshire is in, it is not the best time. Warren Buffet is a visionary man and an investor for life. I have noticed, he buys when times are tough and valuations are good, which is what most massive investors must do too. For smaller investors looking to accumulate positions, this is rarely the bet time. Its a great lifetime buy, its a great long term buy but it might not be so good for a short term positional trade over a short time horizon.

2008 Sep 24 07:53 AM

[Grouper:]

It is a good time to buy if you got Buffet's deal. You and I can't, unless we buy Berkshire. Look at his deal: 10% Preferred, plus immediately in the money warrants: worth 500 million at time of issue, $1B after the market reacted 10%. As soon as you can get that deal from the company that performed best on a relative basis through the current disaster, you should take it, if you can hold for 5 to 10 years. Unfortunately, you can't get that deal.

2008 Sep 24 08:16 AM

[Fabien Hug:]

Fundamentally it is good new. However, when BoA bought CountryWide for $19/shs, everybody was saying; "we have a nice put on the market".
Since I am long GS, I hope that WB is smarter than BoA.

2008 Sep 24 09:07 AM

[Chad @ Sent...:]

This guy doesn't even mention the terms Buffett got...joke of an article. Glad Grouper pointed this out.

2008 Sep 24 09:37 AM

[OldLimey:]

Three thoughts:

1. WB got a phenomenal deal, underwritten - in all probability - by the US taxpayer. Certainly worth a punt from his perspective.
2. Don't the terms of this deal say something pretty negative about the shape GS is really in?
3. Back in the mists of time, sovereign wealth funds poured capital into Merrill and UBS. Was that a good time to buy?

2008 Sep 24 10:29 AM

[User 43089:]

The price that GS paid for capital tells us that they have a lot more issues then they are revealing. Look out when the shorts are allowed to put their positions on again.

2008 Sep 24 02:05 PM

[User 268076:]

The price GS paid shows nothing about what kind of shape they are in, only how hard it is to raise capital now even if you are a great company.

2008 Sep 24 04:44 PM