Is Goldman Sachs Undervalued?

With shares of Goldman Sachs (NYSE:GS) trading at around $145.20, 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:

C = Catalyst for the Stock’s Movement

Goldman Sachs doesn’t take on as much risk as in the past. This might disappoint the more aggressive investor, but it’s a positive sign. It might mean smaller returns, but capital preservation should always be the number one priority.

According to the Fed, the capital plans for Goldman Sachs don’t meet specifications. They must be resubmitted by the end of the third quarter. Other than the Fed stress test, there hasn’t been much news surrounding Goldman Sachs recently. The biggest news that has the most potential to affect the stock price is Cyprus. There is much debate as to whether or not the Cyprus situation is nothing to worry about or if it’s another Lehman moment. Most economists believe the former, which should put most investors at ease. At the same time, most economists thought subprime was a joke and nothing to worry about in early 2008. If Cyprus turns out to be a non-event that blows over, then Goldman Sachs might present a superb bargain here. If Cyrus leads to contagion due to a lack of confidence in the banking system throughout Europe, then financials should be avoided. Nobody knows how it will play out. All we can do right now is look at Goldman Sachs directly.

Despite the Federal Reserve stating that Goldman Sachs needs to restructure its capital plans, this is still one of the most powerful companies in the world. If that wasn’t the case, it wouldn’t have survived the financial crisis of 2008.

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The chart below compares fundamentals for Goldman Sachs, JPMorgan Chase & Co. (NYSE:JPM), and Morgan Stanley (NYSE:MS). These three companies differ in size. Goldman Sachs has a market cap of $70.12 billion, JPMorgan has a market cap of $184.28 billion, and Morgan Stanley has a market cap of $42.95 billion.

GS

JPM

MS

Trailing   P/E

10.33

9.32

N/A

Profit   Margin

21.88%

23.22%

0.26%

ROE

10.10%

10.98%

1.08%

Dividend   Yield

1.40%

2.50%

0.90%

Operating   Cash Flow

$12.88 Billion

$25.08 Billion

$24.55 Billion

Short   Position

1.50%

1.20%

1.30%

Beta

1.62

1.65

2.23

 

Goldman Sachs shows good valuation, a strong profit margin, solid cash flow, and a decent yield. Let’s take a look at some more important numbers prior to forming an opinion on this stock.

E = Equity to Debt Ratio Is Weak

The debt-to-equity ratio for Goldman Sachs needs improvement.

Debt-To-Equity

Cash

Long-Term Debt

GS

6.31

$807.58 Billion

$480.98 Billion

JPM

N/A

$919.04 Billion

$704.98 Billion

MS

5.77

$601.59 Billion

$402.14 Billion

 

T = Technicals on the Stock Chart Are Mixed 

Goldman Sachs has performed well over the past year, but momentum has slowed.

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1 Month

Year-To-Date

1 Year

3 Year

GS

-1.95%

14.14%

15.22%

-12.76%

JPM

1.83%

10.99%

8.07%

14.48%

MS

-1.83%

15.47%

5.00%

-21.62%

 

At $145.20, Goldman Sachs is trading below its 50-day SMA, and above its 100-day SMA and 200-day SMA.

50-Day   SMA

149.31

100-Day   SMA

135.89

200-Day   SMA

120.94

 

E = Earnings Have Been Inconsistent            

Revenue and earnings have been inconsistent on an annual basis, but big profits continue to roll in.

2008

2009

2010

2011

2012

Revenue   ($)in   billions

22.22

45.17

39.16

28.81

34.16

Diluted   EPS ($)

4.47

22.13

13.18

4.51

14.13

 

When we look at the last quarter on a year-over-year basis, we see considerable improvements in revenue and earnings.

12/2011

3/2012

6/2012

9/2012

12/2012

Revenue   ($)in   billions

6.05

9.95

6.63

8.35

9.24

Diluted   EPS ($)

1.94

3.92

1.78

2.85

5.58

 

Now let’s take a look at the next page for the Trends and Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Might Support the Industry

At this moment, it depends solely on the Cyprus situation and whether or not it will affect the global economy.

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Conclusion

Goldman Sachs has proven that it can overcome any type of economic environment or direction challenge. That fact alone makes Goldman Sachs an OUTPERFORM.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

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