2023-04-05 11:51:06 ET
Summary
- Goldman Sachs investors were afforded a fantastic opportunity to add more positions as GS was also caught in the market's risk-off move.
- However, it is well-configured to overcome the recent banking crisis. Moreover, the most anticipated recession of all time has yet to occur, auguring well for GS.
- GS has recovered its medium-term uptrend against its broader financial peers as investors returned to bolster its momentum.
- Its fair value estimates are also attractive. Investors waiting for an opportunity to strike should capitalize on its recent weakness.
Goldman Sachs ( GS ) investors were given an opportunity to pick up more shares during the recent banking crisis in March, as GS fell more than 20% from its early February highs.
As a result, it's arguable that GS' valuation is relatively attractive now, as investors assessed the damage of further contagion. However, JPMorgan ( JPM ) CEO Jamie Dimon reminded investors that the current crisis is not similar to the global financial crisis in 2008. However, he added that the effects could be felt " for years to come."
Citi ( C ) analysts articulated in a recent note that Goldman Sachs is less likely to suffer a significant EPS impact than the regional banks, given its underlying business model.
Moreover, Goldman Sachs held about $241.8B in trading securities on its balance sheet as of the end of 2022, which are marked-to-market or MTM. Notably, it accounted for nearly 56% of its total investments.
Morningstar also highlighted that " wealth management firms are not expected to face a 'run on the bank' scenario," suggesting that Goldman Sachs should emerge from the current crisis in relatively better shape.
Hence, we aren't surprised that GS has outperformed its peers represented in the Financial Select Sector SPDR ETF ( XLF ) since its January lows.
That's right. While there was a broad risk-off move including against GS in March, it demonstrated more robust relative strength against the sector. Moreover, GS/XLF has regained its medium-term uptrend bias, suggesting that the deep recessionary fears have fallen on deaf ears of market operators.
It should be clear by now that the market had already rewarded GS investors in 2021, as its ROE surged to a new high, outperforming JPMorgan. However, it fell dramatically to 10.2% in 2022, likely explaining why GS underperformed its sector peers significantly from September 2021 to April 2022.
The market is forward-looking, as it reflected Goldman Sachs' relative outperformance and underperformance ahead of time.
Moving ahead, GS is expected to post an ROE of 10.91% in FY23, slightly ahead of FY22's 10.2%. However, Wall Street analysts don't expect Goldman Sachs to post a worse performance through FY24, suggesting that the lows observed for GS in June and October 2022 should be sustained.
GS blended fair value estimates (InvestingPro)
Furthermore, the blended fair value estimate for GS is more reasonable now, with a 22% potential upside to its implied fair value.
It's also in line with Morningstar's estimates, suggesting that the current opportunity is attractive after the recent slide.
We noted a bullish reversal on the price action of GS/JPM at its recent March lows, which was supported.
Investors should note that GS outperformed JPM until the peak in August 2022, but GS has yet to recover that relative strength.
However, the recent re-test was pivotal for buyers to demonstrate conviction, and the outcome has been constructive so far. However, GS/JPM has already moved into a medium-term downtrend, suggesting further downside volatility should not be ruled out.
Takeaway
Goldman Sachs is expected to report its Q1 earnings for FY23 this month. Investors seem to have placed their bets that it should continue its outperformance against its broader XLF peers.
However, the recent reorganization of the bank's segments could constitute execution risks even as Goldman Sachs attempts to refocus on earnings growth rather than market share grab in the retail segment.
We believe investors should remain focused on the bank's FICC and equity trading performance, as it accounts for nearly 40% of its valuation . However, a further improvement in its asset and wealth management segment could help improve its earnings growth and lift analysts' projections moving ahead.
If the economy doesn't fall into a deep freeze, we assessed that GS could resume its outperformance over JPM and XLF in the near- and medium term.
Coupled with a more attractive valuation and a defensible balance sheet without significant unrealized losses like its regional banking peers, buyers should consider adding to positions here.
Rating: Strong Buy (Revised from Buy).
Important note: Investors are reminded to do their own due diligence and not rely on the information provided as financial advice. The rating is also not intended to time a specific entry/exit at the point of writing unless otherwise specified.
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For further details see:
Goldman Sachs: If You Waited, Now's Your Chance