Will Recent News Hurt Goldman Sachs?

With shares of Goldman Sachs (NYSE:GS) trading around $168, 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.

A former Goldman Sachs trader was sentenced on Friday to nine months in prison for wire fraud by a judge who took sharp aim at both Goldman and the government, questioning why it took them so long to bring the misconduct to light. Matthew Taylor said in a guilty plea this year that he concealed an unauthorized $8.3 billion trading position in 2007. He told Goldman within 36 hours but escaped criminal charges until this year.

“Goldman was silent about Taylor’s lies,” U.S. District Judge William Pauley said in federal court in Manhattan. The investment banking firm fired Taylor but didn’t disclose the full extent of his misconduct, clearing the way for him to continue as a trader for Morgan Stanley for another four years, the judge said.”So much for Goldman’s concerns about the credibility of the financial markets.”

T = Technicals on the Stock Chart Are Strong

Goldman Sachs stock has made significant progress in the last several quarters. The stock is currently surging higher and looks ready 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 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

24.01%

96%

94%

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

December Options

Flat

Average

January Options

Flat

Average

As of Monday, 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 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 had conflicting feelings 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), Citigroup (NYSE:C), and Morgan Stanley (NYSE:MS) — and sector?

Goldman Sachs

JPMorgan Chase

Citigroup

Morgan Stanley

Sector

Year-to-Date Return

31.62%

28.16%

31.9%

59.05%

38.68%

Goldman Sachs has been an average 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. A former Goldman Sachs trader was sentenced on Friday to nine months in prison for wire fraud by a judge who took sharp aim at both Goldman and the government. The stock has been moving higher in recent years and is currently surging higher. Over the last four quarters, earnings and revenues have been on the rise. However, investors have had conflicting feelings about Goldman Sachs’s earnings announcements. Relative to its peers and sector, Goldman Sachs has been an average relative performer this year to date. Look for Goldman Sachs to 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.