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Can You Believe There Are Still Analysts Arguing How Undervalued Goldman Sachs Is? Those July 150 Puts Say Otherwise, Let’s Take a Look
To begin with , Goldman Sachs produces more accounting revenue and
accounting profits than its peers. This is because Goldman benefits from
virtual monopoly pricing and advantages in several markets. Despite
this advantage, when one factors in economic RISK and the cost of
capital, Goldman doesn’t fare nearly as well as the sell side makes it
seem. Of course, the sell side rarely attempts to quantify risk, which
is cool until reality rears its (sometimes ugly) head. Before we get to
risk adjust returns, let’s look at the simple accounting numbers and
attempt to throw some logic on them…
Above, you see that GS has enjoyed a significant premium over its
peers in terms of book valuation. This premium has actually increased
over the past year. Let me be the one to remind you that no US company
has every survived a criminal judgment, none. Arther Anderson was driven
into bankruptcy from charges stemming from the Enron collapse, and that
is despite the fact that the Supreme Court overturned the guilty
verdict! Assuming, for the benefit of the doubt, GS can somehow set
precedence, or more realistically, criminal charges are not filed, we
still have to contend with:
- the SEC lawsuit
- the increased regulation, in particular the Volcker rule and
derivatives oversight - follow on litigation, which is virtually guaranteed, and virtually
guaranteed to be extremely expensive, time consuming, and distracting
from the core businesses. - a general decline in business since we are coming off of a credit
and risky asset boom and going into a sovereign debt crisis that will
make FICC much less predictable (seeThe Next Step in the Bank Implosion Cycle??? for
a more on how this could end with the Pan-European Sovereign Debt Crisis drama
unfolding).
Taking all of this into consideration, you tell me… Does Goldman
really deserve to be trading at such a premium considering the myriad
risks it is currently exposed to PLUS the murky business and regulatory
environment? They are also losing talent on the sales side, and at the
MD level to boot. Today’s market is starting to see things the Reggie
Middleton way.
Now, let’s factor in some more reality. No matter what your broker
says about accounting earnings and revenues, they don’t come free. They
all have a cost of capital attached to them. Let’s reference an excerpt
from When
the Patina Fades… The Rise and Fall of Goldman Sachs???
GS return
on equity has declined substantially due to deleverage and is only
marginally higher than its current cost of capital. With ROE down to
c12% from c20% during pre-crisis levels, there is no way a stock with
high beta as GS could justify adequate returns to cover the inherent
risk. For GS to trade back at 200 it has to increase its leverage back
to pre-crisis levels to assume ROE of 20%. And for that GS has to
either increase its leverage back to 25x. With curbs on banks leverage
this seems highly unlikely. Without any increase in leverage and ROE,
the stock would only marginally cover returns to shareholders given that
ROE is c12%. Even based on consensus estimates the stock should trade
at about where it is trading right now, leaving no upside potential.
Using BoomBustBlog estimates, the valuation drops considerably since we
take into consideration a decrease in trading revenue or an increase in
the cost of funding in combination with a limitation of leverage due to
the impending global regulation coming down the pike.
Remember, practically everybody poo-poohed my research and opinion in
2008 when I said Goldman was drastically overvalued – Reggie
Middleton on Risk, Reward and Reputations on the Street: the Goldman
Sachs Forensic Analysis. Those 600% to 1000% gains on the put
options proved otherwise. Speaking of which, those July 150 puts… Can
you smell what the forensic analysis is cookin’???
For those who haven’t read my review of Goldman’s latest quarter
performance, please do: A Realistic View
of Goldman Sachs and Their Latest Quarterly Results
More of Reggie on Goldman Sachs
Reggie
Middleton vs Goldman Sachs, Round 2
Reggie
Middleton Personally Contragulates Goldman, but Questions How Much
More Can Be Pulled Off
Get Your Federally
Insured Hedge Fund Here, Twice the Price Sale Going on Now!
Middleton on Goldman Sachs’ fourth quarter, 2008 results
and Morgan losses in the news, about 11 months late
vs. Broker, whom do you trust!
business on Goldman Superheroes
Middleton asks, “Do you guys know who you’re messin’ with?”
Middleton on Risk, Reward and Reputations on the Street: the Goldman
Sachs Forensic Analysis
Middleton on Goldman Sachs Q3 2008
§ As
Reality hits, the Masters of the Universe are starting to look like
regular bank employees
Reggie
Middleton’s Goldman Sach’s Stress Test: Breaking Ranks with the Crowd
Once Again!
Who
is the Newest Riskiest Bank on the Street?
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Thank you once again Reggie for the solid work. Goldman's chart is looking pretty unhealthy right about now. That comment, "Let me be the one to remind you that no US company has every survived a criminal judgment, none." is another nail, hammering Goldman to a cross. Add to that, Iceland's and Greece's citizens wanting to default, and there is a real mess coming up.
As per the Analyst Opinion vs. the Market?
The Only Truth is Price
Yeah, that will happen when PIIGS fly!
Reggie,
Haven't you heard? Goldman is too big to fail, or so they say.
Have you any evidence it is not?
I can believe.
Dear CNBC:
Your ratings are down.
Want to perk them up?
Have Reggie Middleton, Tyler Durden, Chris Whalen, Karl Denninger or Mish on your show ...
Why ruin a good thing?
I think Chris has been on the show a couple of times. Seems like a cool guy, met him at his speech at Blackrock. Quite knowledgeable,,, and straightfoward.