Shares of Goldman Sachs (NYSE:GS) have been under tremendous pressure lately, and many investors are scratching their heads. Heck, even the bears are wondering what’s going on with GS stock.
Many predicted a decline in the stock (more on why they expected it later), down to the $220 level. Some were calling for $215. But not many were looking for a fall down to $205 so quickly. Shares tumbled almost 12% in just three days, with little to no shift in the underlying business.
Further, the Financial Select Sector SPDR ETF (NYSEARCA:XLF) hasn’t felt the same pressure, falling just 2.5% during the same period.
Bulls will point out the low valuation and stellar reputation Goldman Sachs stock carries on Wall Street. That much is quite true, but does it mean we should be buying GS stock?
Valuing Goldman Sachs Stock
The plunge leaves shares of Goldman Sachs trading at 8 times this year’s earnings. If that’s all an investor were to look at, you’d think we were still in the Great Recession. But lo and behold, banks are actually doing quite well.
There are concerns that after Democrats won the House they will make it harder to deregulate the banking industry. But surely that’s not enough to clip Goldman by more than 11% in two days. Thanks to a scandal in Malaysia, where the finance minister now wants to recoup all of the fees that it paid to Goldman for its role, that could be worthy of hurting the stock though. If it works, that’s a $600 million tab for GS.
But at what point does GS stock just get too cheap?
Remember, we’re talking 8 times earnings here. One name — Citigroup (NYSE:C) — carries a lower price-to-book value than Goldman, but not by much. We know this because we just compared all of the major banks, like JPMorgan (NYSE:JPM), Bank of America (NYSE:BAC), Wells Fargo (NYSE:WFC) and Morgan Stanley (NYSE:MS).
Of the bunch, GS stock had one of the lowest valuations. JPMorgan has one of the higher valuations, but is also considered to be the highest quality too. It also has a near-3% yield, compared to Goldman’s payout of just 1.44%.
So what’s left? My problem with valuation is that it’s a measurement, not a catalyst. Meaning that, it’s hard to bet on Wall Street suddenly assigning GS stock a higher valuation when it has refused to do so so far. Why would investors start now? Second, the growth profile is morbid for 2019, with expected earnings and revenue growth of 0.9% and 1.4%, respectively.
Trading GS Stock Price
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When we compared bank stocks, we said investors can buy high quality ones like JPM, growth banks like BAC or value-bin banks like MS or C. Nowhere did we recommend WFC or GS stock, and after the decline in the latter, we sure are glad.
Bears were seeing short-term downtrend resistance (blue line) lining up on Goldman Sachs stock, which is why there were expecting a decline. But they weren’t looking for the stock to tear right through its major moving averages and blow through two-year support.
I outlined this trade the other day, expressing caution over GS stock price. My biggest issue remains the same, which is GS stock price trading below the May 2017 lows, which marks the bottom of range support.
Shares did find support on the backside of a prior downtrend line near $202, so that wasn’t too surprising. But its bounce up to nearly $210 was sold into and that’s not good. We’ve seen stocks that close just below support — as Goldman did on Monday — bounce back with a vengeance the next day. Then it becomes okay.
That didn’t happen, though. GS tumbled, rallied from the lows and still closed below range support. Maybe it comes back to life or maybe a decline to $200 is in the cards. But despite its low valuation and strong-arm reputation, it’s not the bank stock I want to be in.
The price action is too sloppy, the yield is too low and the growth profile is too anemic. I don’t hate GS, but under $210 to $215, I’m avoiding it.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell is long JPM.
