Financials: Big Week Ahead

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.

Goldman SachsAs 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

Big Week for Financials, First Up GS

About Ockham Research 645 Articles

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.

Ockham Research provides its research in a variety of forms and products including our company specific reports, portfolio analytics tools, newsletters, and blog posts. We also offer a white labeling research solution that can give any financial services firm their own research presence without the time and cost associated with building such a robust coverage universe of their own.

Be the first to comment

Leave a Reply

Your email address will not be published.