Should Investors Buy Goldman Sachs Stock Ahead of Its Earnings?

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GS - Should Investors Buy Goldman Sachs Stock Ahead of Its Earnings?

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On Wednesday before the stock market opens, Goldman Sachs (NYSE:GS) will report its fourth-quarter and full-year earnings. Should investors load up on GS stock ahead of the event?

Goldman Sachs stock certainly has been one of the worst performers in the investment-banking industry. The recent track record of GS stock doesn’t exactly inspire confidence, even though GS has a low valuation and generates high profits.

Goldman Sachs stock rallied 1% yesterday after Citigroup (NYSE:C) reported higher-than-expected profits, but missed revenue expectations. Citi’s sales sank 2.2% year-over-year, but that didn’t stop  C stock from advancing 4% yesterday.

Can we expect the same from GS stock tomorrow? Perhaps.

A Preview of Goldman Sachs’ Earnings

GS has beaten analysts’ consensus earnings and revenue expectations for six straight quarters. Its last miss came in its results of the first quarter of 2017, as its top and bottom lines both came in below the consensus outlook.

Expectations for the Q4 results that GS will report tomorrow have been declining, as worries continue to mount about the banking sector’s performance last quarter.

In Q4, investors and investments banks alike saw a dramatic spike in volatility. For Citigroup, that caused issues, but for Goldman, the high volatility could have created opportunities for its trading desk.

As of now, consensus expectations call for $7.78 billion of revenue, a decline of 0.7 percentage points from the same period last year. Analysts’ average estimate now calls for earnings of $5.61 per share of GS stock, down over 12% from the $6.40 per share that analysts were looking for just 90 days ago. Even as recently as seven days ago, analysts were looking for earnings per share of $6.03. So Q4 expectations for GS have come down in a hurry lately.

Despite the estimate cuts, GS stock has held up, climbing almost 2% over the past five trading sessions. At this point, it seems like analysts are pricing in the worst-case scenario.

If Goldman reports in-line results, GS stock will be trading at just over seven times its earnings. That’s an insultingly low valuation for what many on Wall Street regard as one of the most talented firms in the industry.

chart of goldman sachs stock
Click to Enlarge
Source: Chart courtesy of StockCharts.com

Does the low valuation of Goldman Sachs stock make GS stock attractive at current levels? Don’t forget that Goldman Sachs stock also has a dividend yield of 1.8%. For some, a stock trading at seven times its earnings with a decent dividend might be worth buying. However, others might be turned off by Goldman’s expected lack of growth in 2019.

Even if GS finished last year strong, consensus estimates call for revenue growth of just 0.1% and an earnings contraction of 1.2% in 2019. To some, that outlook may make GS stock “dead money” for the next few quarters.

What do the charts say about Goldman Sachs stock?

On the daily chart above, we can see that downtrend support, depicted by the blue line, gave way in November. GS then declined sharply, bottoming out near $150 before rebounding back into the $170s.

chart of GS stock ahead of earnings
Click to Enlarge
Source: Chart courtesy of StockCharts.com

As you can see on the three-year weekly chart above, though, GS just got back above its pre-presidential-election levels. GS stock is also running into its ten-week moving average, which could act as resistance.

On a negative reaction to earnings, I would sell GS below $170. If Goldman Sachs stock falls below that level, the $150 lows would be back on the table. If shares rally above their recent consolidation area near $175, look for a test of the 50-day-moving average near $188. If Goldman Sachs stock climbs above that level, I’d expect prior downtrend support to act as resistance, at least on the first downward test.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell did not hold a position in any of the aforementioned securities.

Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell.


Article printed from InvestorPlace Media, https://investorplace.com/2019/01/buy-goldman-sachs-gs-stock-ahead-of-earnings/.

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