Does Goldman Sachs Support Higher Prices?

With shares of Goldman Sachs (NYSE:GS) trading around $167, 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.

Recently, Goldman Sachs’ offices in Zürich had a visit by regional labor department inspectors regarding a complaint about overtime hours. Spokeswoman Irene Tschopp for Zürich canton’s labor department said that, “There was a complaint from the bank employees union and we’re obligated to investigate complaints,” by phone Thursday, confirming a previous report in the Swiss newspaper Tages-Anzeiger. Tschopp declined to divulge the contents of the complaint or the inspectors’ findings, due to data protection rules, while Goldman Sachs spokeswoman Monika Schaller would not comment. It is alleged that the bank failed to record employees’ working hours or compensate them for overtime, a violation of Swiss law, Tages-Anzeiger reported.

T = Technicals on the Stock Chart Are Strong

Goldman Sachs stock has been working its way towards higher prices in recent times. The stock is currently trading slightly below highs for the year so it may need some time here. 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 slightly 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

25.59%

43%

41%

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

Put IV Skew

Call IV Skew

October Options

Flat

Average

November 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 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)

107.87%

9.44%

203.29%

439.29%

Revenue Growth (Y-O-Y)

0.21%

1.42%

52.69%

132.80%

Earnings Reaction

-1.69%

-1.61%

4.05%

-1.02%

Goldman Sachs has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have expected a little more from 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

31.16%

21.02%

29.20%

50.44%

27.42%

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. It is being reported that the company is currently undergoing investigations in Switzerland over overtime hours. The stock has been moving higher in recent times and is currently trading slightly below highs for the year. Over the last four quarters, earnings and revenues have been rising, however, investors have expected a little more from the company. Relative to its peers and sector, Goldman Sachs has been a year-to-date performance leader. Look for Goldman Sachs to OUTPERFORM.

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