Goldman Sachs (GS) is scheduled to report earnings pre market on Tuesday. A lot of the momentum in financials lately has been because of expectations for this earnings season. Goldman is not immune to these expectations as their stock is up 72% since the market made new lows in early March. Much of the credit for the market’s rally recently has been the fact that management at companies like Citi (C), JP Morgan (JPM), and Bank of America (BAC) have all come out with news that the first quarter will not be as bad as some had feared. Last week, Wells Fargo (WFC) went one step further stating that the acquisition of Wachovia has helped propel the company to a record quarterly profit, somewhere in the neighborhood of $3 billion.
Clearly, there is a lot of positive momentum for financials right now, but we will know a lot more after this week. Financials reporting this week include: Goldman Sachs (GS), JP Morgan (JPM), Citi (C), and quasi-financial General Electric (GE). Whether or not this rally will continue or fade in the near term largely lies on these four companies. Was it wise for some of these key financial stocks to raise expectations? We should have a better understanding after these financials’ quarters go in the books.
As for Goldman Sachs, they have been able to stay above some of the issues that have weighed on other financials and GS has talked about aggressively paying back the TARP funds because they don’t need the extra funds and potential regulation that comes with them. A quarter ago, GS reported their first quarterly loss since 1929, and their first ever as a public company. Underwriting, investment banking, and financial advisory services were all down in the fiscal fourth quarter. It would be surprising if the company didn’t improve on the performance of the fourth quarter, if even slightly.
One encouraging sign announced on Monday was Goldman’s successful launch of GS Vintage Fund V. This fund will target distressed assets from private equity firms, which is a market that could be quite profitable in the years to come. According to the Wall Street Journal, there could be as much as $125 billion worth of assets for sale and only $35 billion market for those assets at present. This is the fifth such fund that Goldman has launched and it was able to raise almost twice the amount of investment dollars than the $3 billion raised for GS Vintage Fund IV in March of 2007. There is money on the sidelines and Goldman is creating a vehicle to coax some of that money back into the market.
Ockham’s valuation of Goldman Sachs is currently a neutral Fairly Valued stance. The stock is on too hot of a run for us to be advocating buying at these levels. However, there is still plenty of upside for GS shares if they are able to surprise to the upside. Expectations are high, as you can see from this quote below from CNBC’s Street Signs, but we would not bet against GS:
“Goldman Sachs tomorrow could be a bullish sign for the markets. Some of the rumors are this could be the best or second best quarter history for Goldman.” Street Signs 4/13/2009