- I was wrong in my July call to buy Goldman Sachs at over $200/share.
- Falling commodity prices have hit the entire banking sector hard, especially trading banks like Goldman.
- Thank God for Dodd-Frank, which requires high capital ratios for just such emergencies.
The last time I looked at Goldman Sachs (NYSE:GS), last July, I made a bad call. I called it one of the best of the big bank stocks to own. Since then it is down 30%. That’s not as bad as Citigroup (NYSE:C), which is down 37%, or Morgan Stanley (NYSE:MS), which is down a whopping 43%, but it’s not good, either.
What has happened is that trading has gone out of fashion. Big banks that are more focused on making loans, like JP Morgan Chase (NYSE:JPM) and Wells Fargo (NYSE:WFC), have done less poorly, although all the big bank stocks are down. The entire banking sector has been taking a pounding over the last seven months, with regional and credit card banks all showing losses similar to those of Goldman. It lies in the nature of a bear market, where a search for yield has banks take it on the chin, especially those that are leading the hunt.
Right now you can buy Goldman stock for about 12 times its 2015 earnings of $12.17. It covers last year’s $2.55/share in dividends almost five times with $12.14/share in earnings, and this was in a pretty bad year, with earnings down about 45% from what Goldman delivered in 2014 and profit margins down to their lowest level since 2011.
Still, Goldman has some of the smartest bankers in the business. Goldman is actually predicting narrower margins for the market this year, and that fundamental analysis looks very sound. Goldman quickly got out of what it called some of its “top trades” this year after market action went against them. A lot of people would have held on. Goldman has moved aggressively to cut costs in the face of rising financial turmoil and CEO Lloyd Blankfein is prepared to do more.
In the near term, Goldman shares could fall further. Two analysts are predicting it could even go broke based on the price action in its Credit Default Swaps, which are basically insurance policies against Goldman going under. These are seeing rising prices right now.
I consider that unlikely, partly because I consider a return to the conditions of 2008 unlikely. But also, thanks in part to the Dodd-Frank law passed in the wake of that disaster, and over the objections of big banks and their lobbyists, Goldman has been forced to maintain a much stronger capital structure than any bank had before the Great Recession, and undergo repeated “stress tests” against potential, unforeseen events that might cause serious damage.
My best advice now is to keep an eye on the headlines, keep an eye on the Goldman Sachs stock, and when everyone tells you the sky is falling, buy it up.