Analysis: GS FDC C JPM

After you receive this Alert, we will be purchasing 50 shares of Goldman Sachs (GS) at roughly $256.15. Following the trade, GS will represent 0.45% of the portfolio.

We are calling up Goldman Sachs from the bullpen this morning because the news that U.S. Consumer prices rose more than expected in January indicates that inflationary pressures are rising, and this could lead to future volatility. As we wrote in yesterday's bullpen Alert, we believe that Goldman Sachs greatly benefits from a volatile market. The bank's trading arm thrives during periods of volatility. For example, past events like Brexit and the 2016 election created great profits for the firm. We are not anticipating a similar political event to occur, but in general as volatility rises, so does Goldman's profits. To read our initial bullpen Alert, please click here.

Our bullish thesis on GS is mainly predicated on:

  • Major turnaround in Trading revenue, the company's largest business, due to the factors mentioned above.
  • The rising interest rate environment will increase the bank's net interest margin, or essentially the spread between what the bank charges for its loan and pays to borrow.
  • Additional business in Institutional Client Services due to higher interest rates and more active central banks.
    • CFO Marty Chavez said during the last earnings call that these trends "correlate with higher client activity."
  • Possible deregulation. Should the Fed Chairman Jerome Powell decide to be more lenient with the banks, Goldman will be able to ramp up its capital return programs.
  • The stock is cheap. It currently sells about 10x 2019 earnings, which is a solid discount to the approximate 15.4 multiple of the S&P 500.
  • Goldman Sachs also trades at about 1.5x tangible book value, which is cheaper than many other major financials, making this a strong value play.
    • For reference, Citigroup (C) trades at 1.2x tangible book value and JP Morgan (JPM) trades at 2.0x tangible book value. We consider Citigroup "value" and JPMorgan "blend" in our Investment Indices.

We are initiating Goldman Sachs with a price target of $285, which represents roughly 12x consensus 2019 earnings. Even though we are bullish in this name, we are starting very small with our position this morning because we want to deploy capital incrementally during this period of volatility. We raised a solid amount of cash on Monday through our exit of First Data Corp.  (FDC) , and we want to keep a degree of flexibility with what have.

We understand that the stock trading flat in this down market, so we are doing about half of our typical initiation. If the market is lower later today, we will purchase the other half. This is all part of how we manage volatility, and please stay tuned to this afternoon's members-only call for real-time updates.

To see how you can access the call, please click here.