Where Will Goldman Sachs Go Post-Earnings?

With shares of Goldman Sachs (NYSE:GS) trading around $175, 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 $34.21 billion and net earnings of $8.04 billion for the year ended December 31, 2013. Diluted earnings per common share were $15.46 compared with $14.13 for the year ended December 31, 2012. Return on average common shareholders’ equity (or, ROE) was 11.0 percent for 2013. Fourth quarter net revenues were $8.78 billion and net earnings were $2.33 billion. Diluted earnings per common share were $4.60 compared with $5.60 for the fourth quarter of 2012 and $2.88 for the third quarter of 2013. Annualized ROE was 12.7 percent for the fourth-quarter of 2013. “Our work in advancing our client franchise and in ensuring continued cost discipline has allowed us to provide solid returns even in a somewhat challenging environment,” said Lloyd C. Blankfein, Chair and Chief Executive Officer. “We believe that we are well positioned to generate solid returns as the economy continues to heal and provide considerable upside for our shareholders as conditions materially improve.”

T = Technicals on the Stock Chart Are Strong

Goldman Sachs stock has made significant progress in the last several quarters. However, the stock is currently trading sideways and may need time to consolidate before heading higher. 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

19.91%

3%

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

February Options

Flat

Average

March 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 Mixed 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 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

-17.86%

1.05%

107.87%

9.44%

Revenue Growth (Y-O-Y)

-4.92%

-19.51%

0.21%

1.42%

Earnings Reaction

-2.28%*

-2.42%

-1.69%

-1.61%

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

* As of this writing

P = Weak 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

-1.42%

0.94%

0.61%

0.86%

1.24%

Goldman Sachs has been a poor relative 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 reported earnings that left investors optimistic. The stock has been moving higher in recent years, but is currently trading sideways. Over the last four quarters, earnings have been increasing while revenues have been mixed. Relative to its peers and sector, Goldman Sachs has been a poor year-to-date performer. Look for Goldman Sachs to OUTPERFORM.

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