Is Goldman Sachs a Buy Post-Earnings?

With shares of Goldman Sachs (NYSE:GS) trading around $168, is GS an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Goldman Sachs is engaged in investment banking, securities, and investment management. It provides a range of financial services to a substantial and diversified client base that includes corporations, financial institutions, governments, and high net worth individuals. The company operates in four segments: investment banking, institutional client services, investing and lending, and investment management. Through its segments, Goldman Sachs provides valuable investment services to consumers and companies worldwide.

Goldman Sachs today reported net revenues of $9.13 billion and net earnings of $2.04 billion for the second quarter ended June 30, 2014. Diluted earnings per common share were $4.10 compared with $3.70 for the second quarter of 2013 and $4.02 for the first quarter of 2014. Annualized return on average common shareholders’ equity (ROE) (1) was 10.9 percent for both the second quarter of 2014 and the first half of 2014.  “We are pleased with our results for the quarter in the context of mixed operating conditions during the period,” said Lloyd C. Blankfein, Chair and Chief Executive Officer. “This performance was driven by the diversity, strength and breadth of our global client franchise. Good client activity in Investment Banking and Investment Management as well as a better environment for our Investing & Lending activities helped offset less favorable conditions for Institutional Client Services.”

T = Technicals on the Stock Chart are Strong

Goldman Sachs stock has not made significant progress over the last couple of quarters. However, the stock is currently surging higher and looks set to continue this path. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Goldman Sachs is trading above its rising key averages which signal neutral to bullish price action in the near-term.

GS

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Goldman Sachs options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Goldman Sachs options

17.47%

0%

0%

What does this mean? This means that investors or traders are buying a very small amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

August Options

Flat

Average

September Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very small amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Goldman Sachs stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Goldman Sachs look like and more importantly, how did the markets like these numbers?

2014 Q2

2014 Q1

2013 Q4

2013 Q3

Earnings Growth (Y-O-Y)

10.81%

-6.29%

-17.86%

1.05%

Revenue Growth (Y-O-Y)

5.96%

-7.55%

-4.92%

-19.51%

Earnings Reaction

1.10%*

0.13%

-2%

-2.42%

Goldman Sachs has seen rising earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Goldman Sachs recent earnings announcements.

* As of this writing

P = Average Relative Performance Versus Peers and Sector

How has Goldman Sachs stock done relative to its peers, JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C), Morgan Stanley (NYSE:MS), and sector?

Goldman Sachs

JPMorgan Chase

Citigroup

Morgan Stanley

Sector

Year-to-Date Return

-5.79%

-3.74%

-7.08%

1.42%

-2.81%

Goldman Sachs has been an average performer, year-to-date.

Conclusion

Goldman Sachs is a bellwether in the financial sector that strives to provide valuable financial products and services to consumers and businesses around the world.  The company today reported earnings that exceed expectations. The stock has not made significant progress over the last couple of quarters, but is currently surging higher. Over the last four quarters, earnings and revenues have been on the rise, which has left investors pleased. Relative to its peers and sector, Goldman Sachs has been an average year-to-date performer. Look for Goldman Sachs to OUTPERFORM.

Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

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