Can Goldman Sachs Continue to Outperform?

With shares of Goldman Sachs (NYSE:GS) trading around $170, 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 lowered shares of RWE AG (NASDAQ:RWEOY) from a buy rating to a neutral rating in a report released. The company has also modified their ratings on a number of other stocks in the few days. The firm upgraded shares of IAMGOLD Corp. from a sell rating to a neutral rating. Also, Goldman Sachs initiated coverage on shares of MarkWest Energy Partners. They issued a buy rating on that stock. Finally, Goldman Sachs initiated coverage on shares of DCP Midstream Partners, LP. They issued a buy rating on that stock.

T = Technicals on the Stock Chart Are Strong

Goldman Sachs stock has made significant progress in the last several quarters. The stock is currently trading near highs for the year and look poised to continue. 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

24.84%

93%

90%

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

Put IV Skew

Call IV Skew

January Options

Flat

Average

February 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 significant 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’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)

1.05%

107.87%

9.44%

203.29%

Revenue Growth (Y-O-Y)

-19.51%

0.21%

1.42%

52.69%

Earnings Reaction

-2.42%

-1.69%

-1.61%

4.05%

Goldman Sachs has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been happy about Goldman Sachs’s recent earnings announcements.

P = Excellent 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

42.59%

31.96%

35.82%

71.36%

37.79%

Goldman Sachs has been a relative performance leader, 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 lowered shares of RWE AG from a buy rating to a neutral rating in a report released. The stock has been moving higher in recent years and is currently trading near highs for the year. Over the last four quarters, earnings and revenues have been on the rise, which has left investors happy about Goldman Sachs’s earnings announcements. Relative to its peers and sector, Goldman Sachs has been a relative performance leader year-to-date. Look for Goldman Sachs to OUTPERFORM.

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