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Goldman Sachs (GS) is a captain of high finance and the banking sector's knight in shining armor. The firm is known for its quick trading action and best-in-class deal-making investment bank. GS has soared 45%, hitting all-time highs, since Biden was elected President on November 3rd. The shares have been met with a recent pullback that represents an excellent buying opportunity.
Volatility is coming back into the market and I have no doubt that Goldman’s best-in-class trading & sales team are taking full advantage. The $275 per share that GS is trading at today represents a robust purchase price for a long-term investment in the gold-standard of high finance.
As you can see from the Trading View chart below, GS bounced off my highest Fibonacci retracement just south of $310 and are coming back down to a strong resistance level north of $260, where the 261.8% retracement and 50-day moving average are approaching convergence.
The economic downturn and proceeding recovery have been an unexpected tailwind for Goldman, driving the business to record profitability the past 2 quarters, with a robust double-digit topline expansion. Due to Goldman's trading and deal-making profit drivers, the bank didn't see the same margin-pinches from the ultra-low interest rates that commercial banks like JP Morgan (JPM) and Bank of America (BAC) did.
GS is expected to continue pushing growth and profitability as a slew of big deals and market action extends into 2021. Analysts have been increasingly optimistic about GS following its record earnings on Tuesday, pushing its EPS estimates on every time horizon and propelling the stock into a Zacks Rank #1 (Strong Buy).
The firm illustrated unbelievable results in the wake of economic uncertainty, taking advantage of new market opportunities. GS reported recorded breaking earnings of $12.08 per share, demonstrating 158% year-over-year growth, and blew Zacks Consensus estimates out of the water by over 72%. Its sales were quite strong as well, showing $11.74 billion, up 18% from the same quarter last year, beating estimates by 22%.
Equity trading and its deal-making investment banking (IB) segment were the two largest growth drivers for this best-in-class investment bank. Goldman's investment banking sector was up 24% in 2020 compared to 2019, and this segment looks like it's just heating up with Q4 IB earnings up 33% from Q3 and 27% year-over-year. Its equities-underwriting portion of IB was booming in 2020 as a record number of businesses hit the public exchanges.
454 companies IPO'ed in 2020, raising over $167 billion, far surpassing the previous record made in 1999 amid the dot-com mania. Goldman was an enormous beneficiary of this push to the public markets. The firm drove over $3.4 billion last year from equity underwriting alone, up 130% from 2019. It looks like this subsegment is only beginning to simmer, with this past quarter generating $1.12 billion, up 195% year-over-year and 30% quarter-over-quarter.
GS's global markets division was its biggest topline driver as the business strategically navigated the choppy market waters and drove this segment's revenue up 43% to a record $21.16 billion, 47% of its total topline in 2020. Equities sales & trading at Goldman appear to be still riding a tailwind as the stock market surges to seemingly no end. This group is up 16% quarter-over-quarter.
What's Next For GS?
David Solomon is proving himself at the helm of this remarkable firm. Since Solomon was named CEO and Chairman of Goldman Sachs on October 1st, 2018, GS shares are up over 22.4%. This may not sound like a lot, but GS has navigated the 2018 year-end sell-off and the most significant economic contraction in over a decade. GS is sizably outperforming its cohorts JPM and BAC, who have only returned 15.4% and 2.7%, respectively. Below is a 1-year price chart of GS (blue) compared to JPM (green) and BAC (red).
Investors & traders pulled profits from all the major banks following earnings over the past few weeks. GS was no expectation as its share price dipped from an all-time high of $309.41 down to the $275 we are trading at today. This has created a tremendous buying opportunity, with 10 out 14 analysts calling GS a strong buy today.
Price targets have risen across the board following the record quarter results on January 19th. The most optimistic are north of $445 a share, representing a 62% upside and even the more conservative recent estimates represent sizable double-digit returns. The large upside potential combined with the firm’s nearly 2% dividend yield makes GS a strong long-term buy and hold today.
I remain a GS buyer despite the run it has already had since the March lows. This company is adaptable and resourceful, and no matter what the economy throws at it, GS comes out on top.
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