With the $550 SEC settlement in the past, all uncertainty and media bashing of Goldman that originally triggered the sell off can fade away.The banking sector as a whole is bullish for many reasons:
1. U.S. Economy is Improving – The sell off in equities has nothing to do with weakness in the U.S. economy rather than global fears. In fact, the U.S. economy is improving month by month. We are seeing a rise in consumer spending and have seen the U.S. unemployment rate fall steadily since hitting a high in January according to the Wall Street Journal.
2. Everyone Else is Selling – Warren Buffet has always said “It pays to be greedy when others are fearful and fearful when others are greedy.” Right now is a time to be greedy. Snatch up those undervalued banking stocks and reap the rewards.
3. European Worries Are Overblown – The fact is that many U.S. banks have little exposure in retail business throughout Europe. This means that they are not exposed to all the failures ahead and have no reason to worry.
4. Expect Lower Tax Bills Ahead – Due to the huge losses many banks absorbed the past year, they will pay virtually no taxes this year. That will help earnings estimates and allow banks to increase book value if they beat estimates.
Goldman has many levers to grow and right now it is cheap, trading at 6 times the past 12 months earnings. Will financial reform hurt Goldman’s trading operations? No; if so the changes will be unnoticeable. As a result Goldman’s 6 P/E ratio can easily be turned into 12-15 P/E ratio. Once the uncertainty wears off, GS will storm back easily and become that $200 stock they use to be.
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Disclosure: "Long GS"