Although Goldman Sachs (GS) was beaten down recently on news of a civil fraud investigation of Goldman by the SEC, don’t count this Wall Street giant out. The fact is that the bad press has driven down shares to bargain levels, and my proven three-point stock screening system is clearly indicating that long-term investors could make the buy of a lifetime snatching up GS shares at current valuations.
Consider that Goldman is now trading at 1.3 times book with its current price of around $159. GS should trade at 1.6 times book — putting shares somewhere in the $210 range. That’s a 32% return for anyone with the guts to buy in right now.
Still not convinced that Goldman is a buy? Well check out these five reasons that GS stock is likely to surge over the next 12 months:
Goldman is oversold
GS shares are down -15% since the SEC investigation was announced on April 16, giving them a -6% return YTD. Stock is well below both its 50-day and 200-day moving average. Goldman has also underperformed both the S&P 500 and the S&P Financials index. And all this because of fraud allegations that most investors don’t fully understand, and claims that don’t even carry criminal penalties!
GS stock fundamentals are strong
Goldman said last week its first-quarter net income nearly doubled to $3.29 billion, bolstered by strength in its trading operations that drove up revenue to a stunning $12.78 billion. The earnings of $5.59 a share blew away the average forecast of $4.01. Those aren’t numbers to sniff at while other financial companies are still weighed down by credit woes.
GS earnings power is intact
This latest blowout report is no anomaly. Goldman’s Q1 profits were its second-best ever … and #1 was just a few months ago when the bank earned a record $4.79 billion! This week’s report marks the fourth-straight double-digit earnings surprise for GS stock, with the average earnings beat topping Wall Street estimates by over 40%.
Goldman Sachs remains well positioned
This company remains the market leader in investment banking. Civil charges against Goldman are, in my opinion, largely politically motivated and not a reflection of poor management or poor operations at GS. After the dust settles over the fraud allegations, it will still be business as usual at Goldman. And that business is very profitable.
GS stock buyback is likely in 2010
Goldman could repurchase $3.5 billion in stock through end of 2010. In simplest terms, a stock buyback reduces the supply of shares on the market and thus boosts prices for existing stock. Coupled with these other four reasons to buy, GS shares could be in for a great ride across the next year or so.