Goldman Sachs (GS) has the potential to be a decent long-term performer, after years of lagging gains vs. the large banks/brokers plus the S&P 500 generally. Yet, technical weakness has persisted in the last few months. This condition may indicate a 10-15% drop is next, before a smarter bullish argument unfolds.
Below are some company highlights and plans to deal with the 2020 COVID-19 pandemic situation, with an emphasis on surviving the year. After the pandemic fades and operating conditions return to a more normal setting, Goldman’s improving balance sheet and steady value accumulation business model should support a move higher in the stock during 2021.
Image Source: Company Presentation
Long-term Operating Performance
Profit margins at Goldman Sachs have remained at a well above S&P 500 normal level the last decade, but they are no longer industry-leading. Below is a chart of the company’s 20% after-tax net margin the past 10 years vs. large capitalization banking/brokerage competitors JPMorgan Chase (JPM), Morgan Stanley (MS), Charles Schwab (SCHW), Bank of America (BAC), and Citigroup (C). Against a decent stock price performance by the group since 2010, Goldman stock has been relatively flat, rising around 30%.
A comparison of Goldman Sachs’ subpar price fluctuations vs. the Financial Select Sector SPDR ETF (XLF) and the SPDR S&P 500 Trust ETF (SPY) are pictured below since 2010.
Goldman’s estimated growth rates in sales and profits are near the industry average for the next 2-3 years. Not the best projected situation in the sector, but definitely not the worst either. Below is a chart of Wall Street analyst expectations for EPS into 2023, alongside a 30-month price change comparison.
Valuation and Dividend Yield Story
The Goldman Sachs valuation and dividend setup are the main bullish arguments today. Price-to-trailing earnings, sales and book value are near a 10-year low right now, just off the March bottom ratios. And the 10x P/E ratio is being generated by a balance sheet, far less leveraged and more conservative than a decade ago.
For income investors, the current 2.5% dividend yield is a 10-year high. Plus, the $1.25 quarterly payout is up 250% the past decade. At the same pace of raises going forward, investors around $201 a share now will be getting closer to 9% as a dividend yield in 2030. Compare Goldman’s projected 9% per annum future yield against the available 10-year Treasury Note returning 0.5% each year, guaranteed to still be 0.5% annually in 2029-30! For safety-minded, yield-hungry investors, a cash payout of 2.5% upfront rising to 9% over time from one of the leading U.S. banks sounds quite appealing. Then you will likely get capital appreciation in the equity price vs. no gain from a Treasury investment or risk-free savings and money market accounts. Higher/rising yields and advancing stock quotes are the primary reasons long-term investors prefer intelligent equity selection for their retirement accounts and as a source of wealth accumulation.
In addition, the 2.5% cash distribution today is solidly above the S&P 500 average dividend yield of 1.7%. Goldman’s dividend story in the middle of 2020 represents its best “relative” position vs. the financial sector and the S&P 500 since the Great Recession of 2009. Below, you can review the bargain condition that may develop on a decent downturn in its stock quote over the short run.
Technical Weakness Continues
So, should you run out and buy Goldman Sachs tomorrow? No, I would not. Here’s why. The company’s stock trading activity has been decidedly bearish of late. Investors are selling the stock, as represented by a number of tells in the momentum indicators I follow closely.
Goldman has underperformed the S&P 500 by -12% the last year, circled in green on the chart below. In addition, the stock has closed underneath both its simple 50-day and 200-day moving averages (around $204 a share) for five straight sessions. Such a formation hasn’t taken place since April.
The Accumulation/Distribution Line (ADL) has been exceptionally weak since January, marked with the blue arrow. ADL measures daily closing prices as a function of the session’s high/low trading range. A falling trend means sellers have knocked the price lower during the day consistently, not at the open. Intraday selling, day after day, can highlight an oversupply or buyer’s strike condition.
The Negative Volume Index (NVI), marked with a red arrow, has been zig-zagging lower since late March. The 50% upmove in price has not been confirmed by the NVI. This indicator looks only at falling volume days for clues of buying/selling. A drop in the NVI can signal selling pressure is greater than buying volumes, on slower news days. Strong price uptrends often have a more robust NVI direction on low-volume days. As an investor with thousands of stocks to choose from, you would prefer to see net buyers each and every day in the stocks you own, including high-volume and low-volume affairs.
Final Thoughts
Goldman’s valuation and dividend yield offer compelling arguments for ownership in early August. However, low-momentum scores from financials and banks the last several months may be predicting a sizable downturn in price is on deck for the industry. My guess is a financial sector sell-off in price may be the next major move into the November election, as investors handicap a probable Democratic win in three months (if voter polls are accurate). Higher corporate taxes and, perhaps, greater regulation of the banking industry could be reality in 2021.
Another wildcard, the faltering U.S. dollar move since April is quite hurtful to bank values. They are the largest holders of dollar-denominated assets, after all. I have talked about the weaker dollar for months on Seeking Alpha as an investment theme, mainly from record money printing and next to zero for interest rates by the Federal Reserve central bank in 2020. You can read my June article describing all the headwinds facing the U.S. dollar’s value here.
I am holding off purchasing Goldman Sachs for lower prices, watching and waiting for another opportunistic entry like March of this year. A Neutral rating for the time being seems fair. A large price decline and/or an improving technical picture will change my mind. From a risk/reward standpoint, stronger valuations and momentum, in combination, would move Goldman into the bullish column.
Thanks for reading. Please consider this article a first step in your due diligence process. Consulting with a registered and experienced investment advisor is suggested before making any trade.
Disclosure: I am/we are short XLF, SPY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This writing is for informational purposes only. All opinions expressed herein are not investment recommendations, and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisor capacity and is not a registered investment advisor. The author recommends investors consult a qualified investment advisor before making any trade. This article is not an investment research report, but an opinion written at a point in time. The author’s opinions expressed herein address only a small cross-section of data related to an investment in securities mentioned. Any analysis presented is based on incomplete information, and is limited in scope and accuracy. The information and data in this article are obtained from sources believed to be reliable, but their accuracy and completeness are not guaranteed. Any and all opinions, estimates, and conclusions are based on the author’s best judgment at the time of publication, and are subject to change without notice. Past performance is no guarantee of future returns.
