After you receive this Alert, we will be buying 25 shares of Goldman Sachs (GS) at roughly $192.14. Following the trade, GS will represent 4.05% of the portfolio.
We will be adding to our position in Goldman Sachs, snatching up shares below the firm's tangible book value per share of $196.64. As we noted last Wednesday during our Daily Rundown Video, below tangible book value has been our target level because it represents great value for long term investors. Essentially, tangible book value per share is what the balance sheet of the company is worth, and a reputable firm with improving, double-digit Return on Tangible Equity (ROTE) performance does not deserve to be trading at a discount.
What has dissuaded the market from rewarding the firm with a premium has been uncertainty related to the 1MDB scandal, however, we think fears over Goldman's legal involvement has become a thing of the past. Management was very apologetic on the recent earnings call, but their view of the scandal suggested that it was an isolated incident and well contained from a financial standpoint.
It's also worth noting that Goldman has made significant strides in decreasing the amount of volatility in its earnings. Behind this is the increased amount of fee-based or more recurring revenues that make up the company's total business. The market always appreciates consistency, and that is exactly what Goldman is achieving with fee-based revenues increasing to 61% from 48% since 2013. More fee-based revenue means less volatility, which in turn, should help the firm command a higher multiple.
Lastly, we believe last Thursday's announced merger of equals between BB&T (BBT) and Sun Trust (STI) is supportive of GS commanding a higher valuation. Those two firms both trade at a significant premium to their respective tangible book value, yet Goldman does not despite its impressive 14.1% return on tangible equity for the full year 2018.