RD's Picks

On fundamentals, the stock looks cheap at just under $180 per share, but all the turmoil involved in valuing financial assets makes reported book values questionable and earnings estimates suspect at best. That said, we don't have much else to value the stock on. We've also just had a bit of a run-up in financials and the stock has traded as low as 142 in the past month. GS pays a dividend yielding 0.8%.

I don't think we've seen the last of bad news in the financials, so I wouldn't buy GS here. A pull back to somewhere in the 150's or 140's on the next piece of bad news would be the time to buy some. If I owned it here, I'd hold on, but be tempted to lighten up if it goes much higher, then look to buy it back cheaper.

I've been playing with WFC in SLO with some success - actually have a gain in it from start of SLO1 - and believe the same trading or accumulation approach could be used for Goldman Sachs. Take advantage of bad news to add to positions, use good news to lighten up; repeat. This approach should only be used on solid companies or you run a high risk of holding the company that's at the center of the bad news, e.g. BSC. Owning strong companies minimizes that risk, but doesn't eliminate it. GS certainly qualifies as a strong company.

There's still quite a bit of risk here. GS has a leveraged balance sheet and Bear Stearns showed just how fast book value can be shredded when leverage works against you. The Fed showed us that they're willing to intervene to keep companies solvent, but that doesn't mean shareholders have any protection - just ask Joe Lewis. Even at the sweetened JPM offer price, BSC's shareholders took massive losses.

In short, GS looks attractive. But, patient buyers are likely to get a better price than Monday's close.

Comments: View Comments |  Tuesday March 25, 2008  |  Stocks: gs,