- Goldman Sachs is an investment bank, not a commercial bank.
- It takes high risks and earns high rewards.
- Given the strength of the U.S. dollar, it is one of the best bank stocks to invest in right now.
I have had a tough time with banking stocks since the Great Recession.
I liked Wells Fargo best among the big banks because it was just doing banking. I still do. It wasn’t doing much proprietary trading. It was a good place for my retirement funds, and it still is. It wasn’t doing what I would consider gambling. It was conservatively run, and has a price-to-book value right now of over 1.7, the best among the large banks.
But the U.S. recovery from the Great Recession has matured. While Wells remains a great core holding for a conservative portfolio like mine, it’s not where I’d look today for capital gains in banking.
Today I’d look to Goldman Sachs (NYSE:GS).
Goldman Sachs isn’t really a commercial bank. It was made one by the government during the crisis. Goldman Sachs is an investment bank. It runs proprietary trading, it underwrites stock and bond issues, it’s involved in commodities and it acts as an advisor to major institutions. It puts its capital at risk in many ways, and earlier in the cycle I found it a dodgy business.
No more. Right now the U.S. currency is strong, the global economy is weak, and there are opportunities here to make some big, big money. Goldman is currently bringing one dollar of every four in revenue to its bottom line. The operating margin is even better, at 33%. Over the last year its financing has become a cash flow machine, $19 billion coming in last year, and another $6.8 billion during the first quarter alone.
When you take on risks others can’t take you can make some fat profits. When you run the casino everyone else has to play in, you can make some very fat profits indeed. While most investors play in the “kiddie pool” of the stock market, where there is enormous transparency and tiny spreads, Goldman has long played in the darker pools of options, and options on things like bonds, options going out years in advance, where prices are opaque, unpublished, and highly negotiable.
These are, in fact, the kinds of markets that created the 2008 crash. Goldman didn’t start the fire known as the Collateralized Debt Obligation, or CDO, mortgage mania of a decade ago, but they were in on it up to their necks. Things like CDOs still exist. Those based on government or corporate debt whose value can be calculated are worthwhile. The point is there’s a global market for trading risk, hedging risk, and buying risk. The collateral is better, but Goldman is still playing.
One reason Goldman is still considered dodgy is that, at the bottom of the crisis, it needed help as much as everyone else. Most had to go to Uncle Sam for that help. Goldman went to its Uncle Warren, Warren Buffett, who still has a 2.8% stake in the bank. He’s a good uncle to have.
Right now there are a lot of countries that need Goldman’s kind of help, Greece only one of many. There are stresses in corporate and government board rooms all over the world. And what can most stabilize these markets are American dollars, currently the world’s strongest currency. No one knows them better than Goldman, and if you’re looking for big profits from the best financial stocks that’s where you should be right now.
Besides, it’s a relative bargain. Goldman Sachs stock currently trades at less than 11 times its earnings. There is concern that its current stock price of $208 is just $25/share below its all-time high, reached in 2007. By the bottom of that conflagration you could get Goldman stocks for just $67 each.
The difference is that was our fire. Goldman burned its own house down. Now other houses are on fire, Goldman’s just the fireman, and for those looking for capital gains from banking stocks, right now, it’s the right place to be.