Do we dare say it? It has become a sport this week to predict the shoe that will drop next. Why not join the fray with a bold prediction that Goldman Sachs (GS) may be the next target for calamity? It’s hard to believe it has come to this and yet that is where we sit today.
The foundation for Wall Street is turning out to be more like quicksand than concrete! Even worse, we should have seen it coming (see, “Don’t Be Deceived: Economy, Market Still Weak“). Knowing that these financial services were making money as a direct result of leverage, greatly increased the risk that the dominoes would fall. Unfortunately, that’s the nature of the beast. Take $1 of equity and with the use of leverage deploy $100 of capital. Make 5% on the $100, pay off the debt and pocket the rest. That’s how you make real money on Wall Street.
The problem is when it all goes south, participating in the leverage puts your entire firm at risk for collapse. And that’s exactly what investors are seeing take place in massive form this week.
I mean seriously. Did anyone really think that Bear Stearns, Lehman (LEH) and Merrill Lynch (MER) would cease to exist in current form in 2008? No way. And now we have the fed bailout of AIG. Would it really be a stretch to add Goldman Sachs to the list?
Talking Heads Talking Utter Nonsense
We are talking about Goldman Sachs, THE GOLD STANDARD of Wall Street. There is absolutely no way GS is going down. The fact that such a statement can be made is a testament to the amount of fear in the market. It is palpable and that is exactly why, in a diversified portfolio, you should consider taking a position in GS.
Why not take the risk? Tuesday, GS announced its earnings report for its recently ended third quarter. For the quarter the company made a profit of $1.81 beating reduced estimates of $1.71. As one might expect revenue dropped in the quarter by 51%. The results were the company’s worst effort since becoming a publicly traded company. That being said, GS is still profitable. Goldman Sachs is still the gold standard and investors should take note. Instead, some folks are selling shares of GS in a throw the baby out with the bathwater mode. It’s out of fear. I get it. It is a bit ridiculous that major firms with huge balance sheets are dropping like flies, but to think GS will be one of those firms makes little sense.
Goldman Sachs was down hard Tuesday on the news, down as much as $18 per share. At $127 per share, the stock is down some 50% from its peak. That is a nice discount for a market leader.
Don’t forget, during a painful correction there will be winners that emerge from this mess (see, “Users Manual for a Bear Market“). I’m betting that GS will be one of the winners. If so, buying when the stock is down will be worth the while.
This article was written by Jamie Dlugosch, contributor to InvestorPlace.com. For more actionable insight likes this, go to: www.InvestorPlace.com.