Goldman Sachs vs. J.P. Morgan: Avoid One, Buy the Other
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You’ve probably noticed the terrible trashing of Goldman Sachs's (NYSE: GS) stock, which fell from $165 per share exactly a year ago to $90 per share as recently as New Year’s Eve heading into 2012.
But January 2012 was a great month for Goldman Sachs. The investment services firm enjoyed a massive turnaround during the past month as its share price has skyrocketed to $115.
Is this turnaround justified?
Let’s answer this question by comparing Goldman Sachs to its competitor, commercial banking and asset management company J.P. Morgan Chase (NYSE: JPM).
Goldman Sachs vs. J.P. Morgan
The two companies have similar earnings per share – 4.5 for Goldman Sachs, 4.4 for J.P. Morgan - but that’s where the similarities end.
Goldman Sachs boasts a meager ROE of 8.7, while J.P. Morgan offers a more robust ROE of 11.5.
Goldman Sachs debt-to-equity is 2.6, which suggests the company is more leveraged than it should be. J.P. Morgan’s debt-to-equity is only 1.57, which tells us that J.P. Morgan simultaneously carries lower debt risk, while also making higher returns.
J.P. Morgan is also cheaper. Shares are trading at a P/E of 8.4, as opposed to Goldman Sachs’s P/E of a whopping 25.6, which is double the industry average.
Not surprisingly, Goldman Sachs’s price-to-book ratio is 0.82, suggesting investor’s lack of confidence in the future of Goldman. (Although -- depending on your temperament – you could also interpret this to suggest that Goldman Sachs is “on sale.” But with a P/E of 25, I’d suggest that Goldman Sachs is not a value buy.)
The Bottom Line
Investors are excited about Goldman Sachs at the moment. Its trading volume is higher than its three-month average, and its stock price has risen dramatically. However, Goldman Sachs’s fundamentals don’t justify the exuberance.
Investors are ignoring J.P. Morgan, which has a trading volume lower than its three-month average. But with its low debt and solid returns, J.P. Morgan is a much more sound choice.
Motley Fool newsletter services recommendGoldman Sachs Group. The Motley Fool owns shares of JPMorgan Chase & Co. Fool blogger Paula Pant owns shares in Goldman Sachs, much to her dismay. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
