Is Goldman Sachs a Worthwhile Investment?

Goldman-Sachs-CEO-Lloyd-Blankfein

With shares of Goldman Sachs (NYSE:GS) trading around $164, 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 invaluable investment services to consumers and companies worldwide.

As a major player in the financial industry that fuels global economic expansion, Goldman Sachs is poised to see increased activity as developing countries grow and companies flourish. On Tuesday morning, Goldman Sachs reported upbeat earnings that destroyed the mean earnings and revenue analyst estimates. In addition, the company said Goldman Sachs and Charter Communications (NASDAQ:CHTR) are joining forces to try and acquire Time Warner Cable (NYSE:TWC). However, earlier in the year, Time Warner Cable turned down a merger with Charter Communications.

T = Technicals on the Stock Chart are Strong

Goldman Sachs stock has seen a powerful surge over the last year. The stock is now trading sideways, as it digests the gains from its impressive run. Analyzing the price trend and its strength can be done using key simple moving averages.

What are the key moving averages? They are 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 signals 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

21.74%

0%

0%

What does this mean? This means that investors or traders are buying a very small amount of call and put options contracts, 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 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 rate, and what that means for Goldman Sachs’s stock.

E = Earnings Are Rising Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. The last four quarterly earnings announcement reactions can also help gauge investor sentiment on Goldman Sachs’s 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?

2013 Q2

2013 Q1

2012 Q4

2012 Q3

Earnings Growth (Y-O-Y)

107.87%

9.44%

203.29%

439.29%

Revenue Growth (Y-O-Y)

29.95%

1.42%

52.69%

132.80%

Earnings Reaction

-1.69%

-1.61%

4.05%

-1.02%

Goldman Sachs has seen rising earnings and revenue figures over the last four quarters. From these numbers, it seems the markets have expected more from Goldman Sachs’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

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

Goldman Sachs

JPMorgan Chase

Morgan Stanley

Citigroup

Sector

Year-to-Date Return

28.53%

27.48%

45.06%

32.33%

25.94%

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

Conclusion

Goldman Sachs is a major player in the financial industry, helping fuel global economic expansion. Recently, the company reported earnings that surpassed analyst expectations, and is also looking to acquire a stake in Time Warner Cable. The stock is now consolidating, after seeing an impressive run in the last year. Over the last four quarters, investors in the company have expected more from recent earnings reports, although earnings and revenue figures have been rising. Relative to its peers and sector, Goldman Sachs has been an average year-to-date performer. Look for Goldman Sachs to OUTPERFORM.

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