Goldman Sachs (GS) for the last six months has been underperforming when compared to its industry peers. However, the firm's earnings have been very impressive as it has managed to surpass analysts' estimates for three out of last four quarters. On the negative frontier, the firm has been battling several issues off late that range from external factors such as the sluggish level of worldwide economic growth to internal matters such as lower client activity. But overall, due to the firm having a well-diversified business portfolio and a strategy that focuses on capitalizing growth prospects, I believe the firm will continue to strengthen in the days to come. Moreover, the firm has uplifted investor confidence through laudable cost control measures and various capital deployment activities that they have undertaken.
In this article, we shall be undertaking a detailed analysis of the equity's technicals that shall solely focus on the weekly and monthly charts as we are anticipating the share price for the future weeks. Moreover, we shall take a keen look at the firm's last quarterly earnings plus the fundamental reasons why investors should purchase the equity and the risks the equity currently faces.
On the technical analysis front, I shall focus on the weekly and monthly charts as I am anticipating a rise in the equity price for the near weeks to come. When the equity's charts are analyzed, we can clearly see that the equity shall be rising by 23 points to 44 points in the next few weeks.
On the Japanese candlestick frontier, the equity has just formed a bullish engulfing pattern on the weekly chart. The bullish engulfing pattern fully sticks to the rules of candle charting as it has formed after a downtrend plus the green bullish body is neatly wrapped around the prior red candles real body. The prior small red body shows us that the bears are losing their steam and that the bulls have now got the upper hand. On the monthly chart, we see that there is a tweezer bottom pattern as both the candles have matching lows and the second candle clearly shows that the bear's drive is easing.
On the moving average frontier, for the weekly chart, the bullish engulfing pattern has just started an attempt to cross over the 20-day MA and this shall certainly occur. Moreover, the candle has encompassed several exponential moving averages, thus signifying a strong bullish drive. For the monthly chart, all the moving averages are rising in a railway track formation, thus showing that an uphill run is on the cards.
For support and resistance, I utilized Fibonacci lines on the weekly chart. For the past few weeks, the equity has been obeying the 100% and 127.2% Fibonacci resistance lines. The 100% Fibonacci resistance line was tested many times and was broken only once, but then the price rise was stopped by the 127.2% resistance level. But coming to the future Fib analysis aspect, the new Fibonacci resistance lines show the 100% Fibonacci resistance zone is 23 points away from the current price whilst the 161.8% level is 44 points away from the current price. For support, the equity has been taking support from the 78.6% level for the past 19 weeks. But for the future, we see that the 100% support level is at $241.18 whilst the 127.2% support level is at $231.85 level.
Thus, I expect the equity to rise in the coming weeks by 23 to 44 points. As this is a projection for the future weeks, there will be naturally some down days on other time frames such as the daily chart, but in the longer time frame, I am certain it shall have a rise to these levels.
Firm's last earnings report:
The firm's fourth-quarter earnings were remarkable as there was a rise in the earnings level of 15.9%. The adjusted earnings per share stood at $5.68 which outdid analysts' estimates which had pegged it at $4.90. Additionally, the firm's bottom line improved by 11.8% year-on-year.
On the negative side, we see that the firm is currently under pressure due to the weak performance seen in their fixed income business line, but this was luckily cancelled out by the continuous rise seen in their investment banking business revenues which in turn buttressed the bottom-line statistics. Moreover, there has been a constant rise in revenues from the firm's underwriting business line.
On the capital position frontier, the firm is on solid ground, as in the fourth quarter results, the organization's supplementary leverage ratio on a fully phased-in basis is 5.8% which is lower than the previous quarter's ratio of 6.4%. Moreover, the ratio was impacted by 30 bps due to the tax legislation.
For the whole of 2017, the adjusted net income per share stood at $19.76 which is higher than the previous year's earnings as they stood at $16.29 per share. Moreover, the earnings outdid the analyst estimate of $18.98.
The firm's capital deployment status changed during 2017 as Goldman Sachs repurchased 29 million shares at an average share price of $231.87 which incurred to them a total cost of $6.72 billion. Specifically, in the fourth-quarter of 2017, the firm procured 6.6 million shares at an average price of $241.13 per share which had a total cost of $1.59 billion. All the share repurchases were made from their common stock portion.
Fundamental reasons to buy:
- The firm's overall revenue levels for the last few quarters has been affected by the harsh market conditions, but still, I believe the firm is poised well in terms of growth and that is all due to its robust investment banking operations and its solid clientele list. Another notable fact is that the firm has managed to retain its top position in the global mergers and acquisition market for the year 2017. Moreover, in April 2016, the firm procured GE's online deposit platform and Goldman also launched an online consumer lending platform called Marcus. Thus, due to the above-mentioned aspects, I am upbeat about Goldman Sachs ability in maintaining a sturdy earnings level in the future and that is all thanks to its high level of business diversification plus its incessant expansion into new business contours.
- The firm is also realizing benefits from the fruitful expense-reduction initiatives it undertook in the past few years. Although the expenses have been on a sort of a roller coaster ride for the past few years, but overall, they have significantly declined especially in 2016. The firm completed an expense reduction initiative in the first half of 2016 which resulted in Goldman Sachs saving funds to the tune of $700 million. Additionally, the results of this expense reduction drive also spilled into the second half of 2016 which resulted in a further saving of an extra $900 million. Furthermore, there was a small increase in the expense level (3%) in 2017, but this was after the huge decline seen in 2016, thus it can be considered as a minute detail. The firm has also placed its focus on improving the efficiency levels in its various divisions. Therefore, due to all these continuous expense activities, we can be certain that the firm's bottom-line in the approaching years shall improve.
- The firm has also maintained a stellar track record in enhancing its shareholders' wealth and that is due to the firm's capital deployment activities. In 2017, the firm drafted a capital blueprint which won regulatory approval. This blueprint included share buybacks and an increase in the firm's quarterly dividend along with the issuance and reclamation of other capital securities. The above-mentioned dividend promise was fulfilled in April 2017 as the firm rose its dividend by 15.4%. This reflects the firm's commitment in returning a positive value to its stockholders plus the firm's robust position regarding its capability of facing severe economic downturns. Additionally, the firm's payout ratio compares positively with the industry.
- The firm appears undervalued in comparison to its industry peers as the firm's current price-to-earnings and price-to-book ratios are lower than the industry average. Therefore, due to the strong fundamentals, the equity has the potential of performing well in the quarters ahead.
Fundamental risks to the firm:
- The firm's institutional client services division in 2017 encountered a very challenging environment due to lower client activity seen in its equity, fixed income, and commodity markets divisions which was coupled with unadorned political uncertainty. If the macroeconomic trepidations linger on for the long term, then the revenues for this division shall be affected further. In 2015, the division's revenues fell by 13% whilst in 2016, they fell again by 5%, but in 2017, there was a stark drop of 30%, thus showing investors that currently, this division was having a rather rough period.
- As the firm has branches in almost all major markets of the world, therefore, the firm has an elevated level of dependency on foreign revenues and that can be seen in the firm's financials from the bygone years. On this frontier, there are numerous risks that curtail primarily from the regulatory and political environment plus the foreign exchange fluctuations. Thus, this may hurt the firm's bottom line going forward.
- Another ongoing risk Goldman Sachs faces is the continuous level of investigations and lawsuits they have with numerous investors and regulators. Although the firm has managed to resolute some of the lawsuits linked to the sale of its mortgage-backed securities division, but still many of the lawsuits remain unresolved. Thus, these shall most definitely lead to higher expenses and litigation provisions in the near tenure.
Goldman Sachs is an institution with a bright future due to its diverse business nature, and I am positive that the firm's share price shall rise to the above-mentioned levels in the near weeks to come. I say this as the firm's technicals and fundamentals support this notion. Moreover, I am certain it shall break through the 100% Fibonacci resistance line and reach the 161.8% level 44 points away. Thus, if you plan to trade this equity, then you ought to ensure that you utilize a trailing stop so that your capital is as safe as it can get.
Good luck trading.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.