Goldman Sachs (GS) has received another glowing recommendation from a Wall Street analyst on Tuesday. This time it is Friedman, Billings, Ramsey & Co. analyst Steve Stelmach who wrote in a research note that Goldman has been able to handle the turmoil in the markets and gain more market share through the recent downturn. No doubt, all other things being equal, Goldman has less competition to deal with as Lehman Brothers and Bear Stearns are gone and Merrill has been acquired by Bank of America (BAC). Stelmach dramatically raised his second quarter earnings estimate by 42% and also his full year estimate by more than 15%. He is not the only analyst to praise Goldman’s recent performance, in the last 30 days 8 analysts have upped their earnings estimates for Goldman Sachs while only one has lowered, according to Yahoo! finance.
Perhaps no one in the financial sector has benefited more by the market’s turnaround, as credit market have loosened considerably and investment banking operations are returning to some semblance of normalcy. The rash of secondary equity as well as debt offerings have been a boon to Goldman Sachs and the fixed income division has been strong as well. Stalmach also points to the fact that many of Goldman’s competitors have been mired in complex mergers themselves and because Goldman has not merged with anyone they have a streamlined focus on growing their business. Furthermore, Goldman has long been an important dealer of U.S. Treasury bonds, which as everyone knows has been extremely active recently.
The stock is getting a small boost today from the positive research call, and the boost in estimates and price targets. It appears that many financial sector analysts see Goldman as the gold standard in investment banking. The bank was among the first group to repay the TARP funding, which in GS’s case was about $10 billion. Now that they have thrown off the yoke of added government regulation, yesterday a report came out of London saying that Goldman will pay out record bonuses this quarter. Now that is a bold move! Goldman knows that many market observers are suspect of Goldman’s seemingly incestuous relationship with the U.S. Treasury, but is undeterred by the seeming conflict of interest.
The first half of the year has been impressive, they made a lot of money as the broker of U.S. government debt as the Administration has proposed to issue $3.25 trillion in bonds before September (nearly 4 times more than all of last year). Notably, Goldman received more than $10 billion from the government to cover already hedged bets made through AIG (AIG). Still, they are giving away bigger bonuses than anytime in their 140 year history. Now we are not advocating restricting pay, and it is true that banks need to retain talent right now. However, for a bank that seems to make all the right moves, it would seem a little more tact would go a long way. Compared to the media firestorm that was created when AIG’s bonuses were released, the lack of attention paid to Goldman’s bonuses is notable.
As for the Ockham valuation, we have placed an Overvalued rating on Goldman Sachs because the stock has advanced too fast to meet our value investment criteria. There is no doubt Goldman has rebounded quicker than its competitors after a rough 4th quarter, but the stock has advanced 250% from its low point in January. There is certainly potential for Goldman to go higher as it was $235 just about a year and a half ago, but at this point it does not fit into our investment methodology.