As market watchers are well aware, Goldman Sachs (GS) cruised to a solid profit in the third quarter of $3.19 billion or $5.25 per share. Goldman tripled their earnings of last year, and handily beat consensus analysts’ estimates of $4.24 per share. Trading and the firm’s own investments drove the better than expected results. Revenue from fixed-income investments also ballooned to $6 billion, nearly 400% more than the same period a year ago. Normally, beating earnings estimates by about 24% in a still fragile economy would be met by bullishness, but today Goldman was a victim of the hype and shares traded down nearly 2% on the day.
What happened today serves as an example of why we believe Goldman is Overvalued. The stock has nearly quadrupled in less than a year, and bullish optimism has permeated so deeply that not even an impressive quarter such as this can assuage the market. The “whispers” on the Street were for the possibility of another record quarter, or possibly earnings of $6 per share. The hype surrounding what famed bullish analyst Dick Bove described as the best managed bank on Wall Street had reached extreme levels.
Many news outfits will use the $5.4 billion held for employee bonuses as fodder for headlines, and up to this point the firm is on pace to match its compensation levels during the record profit year of 2007. We will avoid publicizing our leanings on the topic, but Goldman’s actions should come as no surprise as the company was extremely eager to throw off the yoke of the government’s TARP payments. The fine line between retaining talent and drawing public outrage is sure to be a focal point of Goldman in the coming months.
The unearthly expectation the market has placed on GS is one reason that we are not advising holding shares at these levels. There is little doubt that Goldman has been performing at a high level in the last few quarters, and we do not dispute their competitive positioning in the industry. However, we think that the price nearing $200 has already priced in a lot of these competitive strengths.
From a value perspective, we think that Goldman trading near $200 is just a little too much to ask; especially considering their otherwise blowout quarter being met with disappointment. It seems the fundamentals are strengthening in order to match the high price level. At Ockham, we generally try and find stocks that are in the opposite situation where the fundamentals are strong and we think the price will start to reflect that. As such, we are maintaining our Overvalued stance on Goldman Sachs as of the earnings report.
“A lot of down arrows for the banks. Goldman Sachs a buy on the rumor sell on the news. Not that people were so disappointed with Goldman Sachs, but it was up to $190.” — Fox Business Network’s Countdown to Closing Bell 10/15/2009