Just when you Thought you’d Seen it All
Tim is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
By now you’ve seen and/or heard about Greg Smith’s little tirade aimed at his former employer, Goldman Sachs (NYSE: GS) in the op-ed section of the NY Times on Wednesday. The stock proceeded to tumble, opinions galore started flying and even now former and current executives from a number of firms are chipping in their two cents worth. Though there’s nothing quite like a little soap opera, this raises concerns that go beyond tainted reputations.
What’s most disconcerting was and is the significant share price movement that ensued after Mr. Smith’s rant. Really? The fact that a $60 billion industry leader’s valuation can be impacted – let alone significantly so – by the opinion of a mid-level, disgruntled employee is mind-boggling, regardless of what side of the fence you fall on.
The focus should be on the reasons behind Goldman’s ridiculously high valuations right now. Yes, the firm did report an increase in revenues and earnings quarter-over-quarter, but a look at the last several announcements have been less than stellar. Three straight years of declining revenues and earnings is hardly worthy of a valuation over twice virtually every other company in the sector. Clearly they're hardly alone -- what financial services company hasn’t had a few tough years? Of course, Goldman Sachs has little if anything in common with traditional banks, and that’s part of the reason for investors' optimism.
As one of the world’s largest investment firms, Goldman primarily generates revenues via trading and investment banking activities. And there’s no denying improvements in the market, and many investors and analysts are of the mind these will continue. Strong job reports and consumer sentiment data is announced seemingly daily, and all this bodes well for Goldman and others that rely heavily on market performance. As expensive as the stock is currently – it’s trading at nearly 28 times earnings – based on future earnings estimates it remains a decent value with a P/E of around 9. Needless to say management and shareholders are expecting big things in 2012.
At first glance it would appear a firm like State Street (NYSE: STT) would offer more upside. At just over 12 times earnings it would seem a bargain compared to Goldman. But if future earnings are even close to what’s expected, Goldman is actually trading for less than State Street and dividends are about the same. For traders who want to profit from an improved economic and investment environment, one of the best of the bunch remains JPMorgan Chase (NYSE: JPM). A more diversified product line – they actually offer traditional bank services in addition to trading and investment banking – the best dividend yield in the industry by far and a better value than Goldman.
Unless you’re a card-carrying daytrader, when it’s all said and done invest your hard-earned dollars based on fundamental and/or technical analysis - or at least something tangible - not the “Why I am leaving Goldman Sachs” rant of a disgruntled employee.
The investment opinions included are just that, opinions. Investing involves risk, as you well know, so consider your decisions wisely. Tim holds no position in the securities mentioned in this article.