Does The Goldman Sachs Conviction Buy List Live Up To Its Hype?

Includes: GS, RSH
by: Kyle Fishman


Most investment analyst banks or firms have three different levels of ratings for stocks for each stock; buy, hold/neutral, or sell.

Goldman Sachs, one of the most prestigious and well-recognized investment banks in America, has a fourth level; "Conviction Buy".

The definition of "conviction": a firmly held belief or opinion.

Goldman Sachs (NYSE:GS) is unique among investment banks in that it separates "buys" from "conviction buys" to emphasize just how much they believe in their stock pick.

Many investors may be lead to believe that if a stock is on the Goldman Sachs Conviction buy list, it must be a good investment.

However, I have examined their track record, and have found a large amount of evidence that the Goldman Sachs Conviction Buy list doesn't hold any credibility.

In August of 2011, RadioShack Corp. (NYSE:RSH) was upgraded to "Conviction Buy" while it was trading around $14/share. Since this call was made, it has never gone above $14/share, and today it trades as a penny stock, hovering around $1/share, in danger of going bankrupt and in danger of being delisted from the New York Stock Exchange. If a disaster like this could make it onto the Goldman Sachs Conviction Buy List, anything can.

I'm not just cherry-picking one example. If you take a look at other examples from random selection, it becomes clear that they do not have a track record that beats the market averages;

In late 2013, Goldman Sachs made some major changes to their Conviction Buy list. Let's examine how their picks compared to the S & P 500, which gained approximately 8% since December 1, 2013. Here are some of the stocks that were recently added to the Goldman Sachs Conviction Buy list in late 2013, and how they performed from December 2013 to present:

Dollar General (NYSE:DG): gained 0%.

MGIC Investment Corp. (NYSE:MTG): gained 14%.

Tiffany & Co. (NYSE:TIF): gained 12.5%.

AbbVie Inc. (NYSE:ABBV): gained 17%.

US Bancorp (NYSE:USB): gained 10%.

Extra Space Storage Inc. (NYSE:EXR): gained 26.5%

Marketo Inc. (NASDAQ:MKTO): gained 0%.

Priceline (PCLN): gained 1.5%

Vitamin Shoppe (NYSE:VSI): lost 21%

From this sample size of recent picks, the average gain is 6.72%, which is less than the S & P 500's gain of 8.3% during the same time period.

It should also be noted that some of the stocks that were removed from the Goldman Sachs Conviction Buy List ended up performing very well.

Cisco System (NASDAQ:CSCO): gained 16.5%.

Omega Healthcare Investors Inc. (NYSE:OHI): gained 11.8%.

Now to compare performance of Goldman Sachs Conviction Buy picks that are a little older, here are some of their selections' performance from December 1, 2011 to June 30, 2012, during a period where the S & P 500 gained 8.6%:

Apple (NASDAQ:AAPL): gained 55%

EMC Corporation (EMC): gained 3.5%

Oracle Corporation (NYSE:ORCL): lost 6%

Qualcomm Inc. (NASDAQ:QCOM): gained 2.5%

Visa (NYSE:V): gained 29%

VMware Inc. (NYSE:VMW): lost 10%

Aeroflex Holding (NYSE:ARX): lost 40%

NCR Corporation (NYSE:NCR): gained 30%

Synchronoss Technologies Inc. (NYSE:SNR): lost 36%

This sample size produces an average gain of 3.1%, which is less than the S & P 500's gain of 8.6% during the same time period.

It should also be noted that while Goldman Sachs had Apple on its Conviction Buy List while it was less than $400/share and made the call in time for the strong spike up, Goldman Sachs also maintained Apple on its list during its plunge back down in 2013, and removed Apple after it had fallen.....only to miss Apple going back up again.

Conclusion: While we could spend many more hours going through the history of Goldman Sachs' predictions, these sample sizes reflect the point that their calls are very volatile, unreliable, and often fail to beat the broad market's performance. Their track record is very shaky, and the performance of RadioShak should serve as a reminder that any one of their stock picks can go down to zero.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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