Cramer – Mad About Goldman Sachs (GS)

“I’m saying it’s a travesty. Just a travesty. His crime? No crime at all. While serving as Chairman of the New York Fed’s Board of Directors, the former Co-Ceo of Goldman Sachs sought permission from the Fed and from Goldman Sachs to buy stock and both the fed’s counsel and the counsel of Goldman Sachs blessed the transaction. Keep in mind the New York Fed’s Executive Vice President and General Counsel, Thomas Baxter, says Friedman’s purchases of Goldman Sachs stock in December 2008 and January 2009 did not violate any federal reserve statute, rule, or policy…” – Jim Cramer, Mad Money, May 8th, 2009.

As always, its not easy keeping up with Cramer. He mentioned Goldman Sachs (GS) at least five times during the broadcast on Friday, and each time it seemed to be more and more ferocious. Generally, Cramer likes to avoid some of the more directly confrontational discussions with regulators, despite the media making him out to be a rabid dog. But following Stephen Friedman’s resignation last Thursday, it appeared that he just couldn’t hold back. From the WSJ on Friday:

Mr. Friedman, 71 years old, resigned from his post at the powerful New York Fed bank Thursday, following a Wall Street Journal article that detailed how he had run afoul of Fed rules by continuing to serve as a Goldman director and hold Goldman shares after Goldman became a bank-holding company in September. New York Fed lawyers had sought a waiver on the policy preventing him from having such ties to bank-holding companies, but the waiver wasn’t granted until January, at which point Mr. Friedman had already bought additional Goldman stock. His purchases in the past five months have risen by more than $3 million. – Wall Street Journal, May 9th, 2009.

At Ockham, we are very interested not only in the fundamentals and price movements of companies, but also the perception of those companies in the media. It has become increasingly apparent, particularly over the last year, that the media and its outward presentation of companies (whether vilified or not) is a huge component of stock price movement. While this is intuitively known by most professional traders, the understanding of television or media impact upon investments is becoming more a part of the individual investor’s purview as well.

In this case, Goldman Sachs is once again at the center of a conspiracy theory of world domination. The Friedman incident is just another in a long line of accusations about Goldman Sachs. Cramer took specific aim at these insinuations and we think he will continue to do so. Not necessarily just because he has a problem with the content of such remarks, but perhaps also because he understand the type of power that media and television personalities have to hurt reputations of corporations perhaps a bit better than most.

From a fundamentals view, GS’s run in the last quarter has really overheat the stock from our perspective. Price to Cash Earnings are now pegged at 31.58, which is substantially above the historical normal high for Goldman. Ockham continues to maintain an overvalued rating on Goldman Sachs stock, and when taken with the continued media focus, it might be a good time to find some other financials to focus on.

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Ockham Research is an independent equity research provider based in Atlanta, Georgia. Security analysis at Ockham Research is based upon the principle known as Ockham's Razor, named for the 14th- century Franciscan friar, William of Ockham. The principle states that a useful theory should utilize as few elements as possible, because efficiency is valuable. In this spirit, our goal is to make the investing environment as simple and understandable as possible, yet no simpler than is necessary.

We utilize this straightforward approach to value over 5500 securities, with key emphasis given to the study of individual securities' price-to-sales, price-to-cash earnings and other historical valuation ranges. Our long term value investing methodology is powered by the teachings of Ben Graham and it has proven to be very adept at identifying stock prices that are out of line with fundamental factors.

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