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Friday, April 30, 2010

Goldman Sachs - Buy or Sell?

GS has taken a beating recently, both with the public flogging its members have taken from Congress as well as its stock price. Just how much is Goldman’s image damaged? Is it the same company it was? For my opinion, I refer you to the MS Outlook note I scheduled for myself next week:

"Buy more Goldman Sachs if share price has stabilized."

Goldman is a company of sharks, whose ambition is to make money no matter what the circumstances: usually, this is one of their selling points. Goldman taking bets against its own large clients is similar to college girls flashing their breasts during spring break: shocking, but not surprising.

In a large financial institution it’s common for one arm to take a position opposite to another, sometimes without either side knowing. For example, in one bank I know, the brokerage arm was recommending natural gas stocks to clients, as well as taking long positions in its own portfolio. The trading arm of the same firm was shorting natural gas futures. Traders for large firms are given significant independence.

Salespeople at brokerages generally have to go with the recommendations of their analysts, even if the salespeople themselves think the investments are garbage. As strange as this may sound, it is a necessity. Investing is an art, not a science, and it is highly unlikely that all brokers at a firm would agree whether a stock is a “buy” or a “sell.” For obvious reasons, a firm can’t have one broker advising clients to buy a stock while the broker at the next desk is advising them to sell it. In addition, if a broker sells something they personally recommend (but analysts of the firm don’t), they can be sued if that investment turns sour. For all these reasons, brokers must sell whatever their company’s “squawk box” is touting. Yet, when investigators find evidence of a broker selling stock that they personally hate, it’s presented in the media as “proof” that the company is corrupt.

Goldman is the same company that it was two weeks ago, only a) it could owe a large fine and face criminal charges, and b) its stock price is 27% lower. Unless Goldman is fined 20 billion dollars (the approx. market capitalization it has lost since 2 weeks ago) its stock is now a bargain.

Goldman Sachs is no angel, and never has been. It is still a company of sharks, intent on making money. It is still the firm that every broker wants to work for. And its P/E ratio is 6.1.

Goldman is a buy.



Price (at time of writing): $145.20

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“As a public company, Goldman Sachs will have the financial strength and strategic flexibility to continue to serve our clients effectively as well as to respond thoughtfully to the business and competitive environment over the long term.”
Henry (Hank) Paulson, former U.S. Treasury Secretary, during his time as Goldman Sachs CEO, June 1998.
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Disclosure
Do not buy stocks, or take this or any other financial advice without doing your own analysis; including, but not limited to: reviewing business models, financial statements, management style and philosophy, recent developments, market macroeconomic analysis, and chart analysis. If you do not know how to do these things, you shouldn't be buying stocks in the first place. Seek the advice of professionals, as appropriate.