Goldman Sachs outperforms, but is tied to broad market

Do Trading Cowboys Read Barron’s?

According to Barron's, shares of Goldman Sachs, the largest pure investment bank and institutional broker on the Street, could rally 25% in the next year if capital markets improve.

In its heyday, GS was a money machine, it dominated, its shares traded at a fat premium to its peers; more than 2.5 times tangible book value. Yesterday, as Barron’s put it, GS is “an exemplar of Wall Street’s hamstrung, post-crisis fate: forced to carry more inert capital, unable to trade as much for its own book, embarrassed by criticism of some past sales practices, hampered by lethargic trading and merger volumes, and tangled in a regulatory regime whose only certainty is that it will be more onerous than what came before.”

 GS, currently trading at 90% of current tangible book value, is now viewed as less financially risky, with more risk management tools in place and the use of leverage now half of what it once was. The company continues building a capital cushion while taking more and more costs out of its business. Also little, if any, value in GS shares price is being given to Goldman Sachs Asset Management and GS’s potential for emerging-markets growth.

What's the bear case on GS?

Barron’s laid it out: “Regulation, lower financial leverage, reputational damage and a long-lasting ebb in capital-market volume will prevent the firm from earning an acceptable rate of return on shareholders’ capital, even as it continues to overpay teams of trading cowboys to take undue risks.”

 All discounted in GS share price?

The fortunes of investment dealers are for the most part connected to the ebb and flow of the market. Year-to-date, while the NASDAQ Composite is up 19.6%, DJIA up 10% and S&P 500 up 14.6%, GS has outperformed all indexes by gaining 25.7%. If brokerage stocks do trade hand-in-hand with the broader markets caveat emptor: GS's Chief Equity Strategist David Kostin’s year-end S&P 500 forecast has been at 1,250 since the beginning of the year, that’s a decline of ~13% from current levels.

Goldman Sachs (GS : NYSE : US$116.86), Net Change: 3.18, % Change: 2.80%, Volume: 5,304,676

About the Author

Canaccord Genuity Inc. is a global investment banking and institutional brokerage firm. Their website is www.canaccordgenuity.com.

For disclosures of any equities mentioned here please see: http://www.canaccordgenuity.com/en/ODD/pages/disclosures.aspx.

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