Where Will Goldman Sachs Go Next?

With shares of Goldman Sachs (NYSE:GS) trading around $156, 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.

Federal regulators are scrutinizing Goldman Sachs’s high-frequency trading operations, the latest crackdown on what the government sees as potential market manipulation by some of Wall Street’s biggest banks. In recent months, federal authorities have ramped up their scrutiny of high-frequency trading, a general term used to describe methods by which firms can buy and sell stocks ahead of other investors. In April, Attorney General Eric H. Holder Jr. confirmed that the Justice Department was investigating high-speed trading “to determine whether it violates insider trading laws.” Eric T. Schneiderman, the New York attorney general, has called the practice “Insider Trading 2.0.” Goldman disclosed that it was under investigation in a regulatory filing on Friday but did not identify by which agency. The filing also confirmed that the bank was under investigation for potential violations of the Foreign Corrupt Practices Act, including its hiring practices abroad. In addition, Goldman said in the filing that it expects its litigation expenses to remain “high” and disclosed that it had increased its reserves to pay for legal expenses to $3.7 billion from $3.6 billion.

T = Technicals on the Stock Chart Are Mixed

Goldman Sachs stock has not made significant progress over the last couple of quarters. However, the stock is currently moving higher and looks set 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 below its rising key averages which signal neutral to bearish 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

17.63%

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

June Options

Steep

Average

July Options

Steep

Average

As of today, there is an average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish 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 bearish 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 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?

2014 Q1

2013 Q4

2013 Q3

2013 Q2

Earnings Growth (Y-O-Y)

-6.29%

-17.86%

1.05%

107.87%

Revenue Growth (Y-O-Y)

-7.55%

-4.92%

-19.51%

0.21%

Earnings Reaction

0.13%

-2%

-2.42%

-1.69%

Goldman Sachs has seen mixed earnings and decreasing revenue figures over the last four quarters. From these numbers, the markets have had conflicting feelings about Goldman Sachs recent earnings announcements.

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

-11.40%

-7.52%

-9.69%

-5.36%

-7.49%

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. Federal regulators are scrutinizing Goldman Sachs’s high-frequency trading operations. The stock has not made significant progress over the last couple of quarters, but is currently moving higher. Over the last four quarters, earnings have been mixed while revenues have been decreasing, which has produced conflicting feelings among investors. Relative to its peers and sector, Goldman Sachs has been a poor year-to-date performer. WAIT AND SEE what Goldman Sachs does next.

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