Investment banking star, Goldman Sachs Group, Inc. (NYSE: GS), has many analysts scratching their heads. The turmoil in the financial sector, a weak economy and its conversion to a bank holding company result in a mixture that is difficult to value.
As a result of the uncertainty, GS shares have been trading with a high degree of volatility. Yesterday, a huge piece of uncertainty was removed from the equation.
With some expecting the company to post a massive loss in excess of $5 billion, GS managed to lose only $2.29 billion, or $4.97 per share. Even though the loss was greater than Wall Street expectations, investors cheered that the news was not worse.
GS shares were up $9.54 to $76 per share yesterday after the release.
So what am I missing here?
The news was bad, its business model is becoming much more conservative, and the economy continues to struggle. Yet that is a great reason to buy the stock? This is exactly the type of situation where instinct needs to kick in to help us determine the value of GS.
The investment banking model has changed forever. The huge profits generated by trading and leverage are no longer part of the equation. That means GS will make less money in the future.
Now the company may claim that a move to a bank holding company will do nothing of the sort, but my experience tells me otherwise. I just don't see the pizzazz that existed previously. Profits will not be what they were.
I am going to trust my instinct here by believing that GS will be cheaper down the road.
I would use the huge gains from yesterday as a justification for taking money off the table. I simply believe you can buy back shares at a cheaper price down the road.
Analysts expect GS to make close to $10 per share in 2009. I'm not buying that bill of goods. The company will be fortunate to make $5 per share next year. Put a 10 multiple on that and you get a $50 per stock.
Jamie Dlugosch is a contributor to OptionsZone.com.
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Reader Comments (Page 1 of 1)
12-17-2008 @ 6:21PM
Desert Dave said...
"pizazzz"??? Is that what you call buying losing mortgage securities? I hope they've lost this type of pizazzz - maybe they'll actually make a profit in the future and the rest of us won't need to bail them out again.
Two reasons why Goldman won't 'fail' - the government has already committed to fund them until they are profitable and Warren Buffet owns part of the company now.
In any event, a better way to purchase GS would be to buy Berkshire-Hathaway. Buffet got one of the best deals available on their stock.
12-17-2008 @ 11:06PM
jd said...
GS is a short at this level. I agree with the $50 price. In fact, a few more bad quarters and it could see $40. People are looking for sunshine in caves with no end. They think GS not losing $5 billion was good. But they lost nearly $5/share. The book value is putatively $98/share. But the value of their mortgage-backed securities is near nothing. Only when GS and all the other banks appraise their mortgage-backed securities at fair value will we know where the stock price should be.
12-18-2008 @ 5:22AM
grandpa buffet selfish said...
Let Warren Buffet bail them out , he's rich ........he's worth $50 billion , the richest man on earth ........share your wealth . Better yet , help your granddaughter out , she has NO health insurance grandpa and you can help her . Shame on you for not helping her ....selfish
12-18-2008 @ 9:25AM
BHarrison said...
Question: Is there any real difference between what Madoff has done versus what Goldman Sach and many of the other corporations have done with the "derivatives" . . . the CDSs, the CDOs, the CMOs, etc?
A pyramid and Ponzi scheme are CRIMINAL, regardless of who orchestrates or perpetuates it, right?
As is said: " 'Evil' exists and persists because "good men" do
nothing (sic. to prevent or to counter it)."
Even by IRS "standards", an employee cannot use the "excuse" that
they were threatened or intimidated by the threat, actural or
implied, into participating in FRAUD or losing their jobs. They
ALWAYS have the choice and right to leave employment of a company
involved in criminal activity.
Should the corporate upper managment personnel be "judged by or held
to a different standard" than what applies to ALL EMPLOYEES ? I think not!
Goldman Sach's "conversion to become a bank holding company" is an obvious ploy to enable it to gecome eligible for some of the $700 BILLION Bailout monies.
It is past time to indict and to prosecute those who have orchestrated and been complicit in these pyramid and Ponzi schemes.