Goldman Sachs: The Good, The Bad And The Ugly
Investors certainly can't be held liable for not understanding what to make of Goldman Sachs Group (NYSE: GS). Investors aren't alone. Even though it is one of the largest investment banking firms in the country with a market cap over $84 billion, it sometimes seems company management isn't quite certain what to make of the firm. The Good Even with Goldman trading up over $1.50 a share at $150.63 as of this writing, this still leaves the firm well below it's 52-week trading high of $174.34 reached January 14. The P/E, while not the lowest in the sector, remains an attractive 11.43, well within a range value investors will certainly appreciate. Goldman Sachs was also a part of the recent big news on Wall Street; the announcement of Microsoft's $8.5 billion purchase of Skype. Goldman is one of the two primary advisors on the deal, along with JP Morgan. Goldman has a long history working with Skype management. An acquisition of this size won't do anything to hurt GS earnings, which is an already healthy $13.08 per share. But what has investors even more excited is the possibility that the Wall Street mega-deal is making a return. If this turns out to be the case, the remainder of 2011 is going to be very kind to GS shareholders. The Bad It was about this time last year Goldman Sachs wrote a $550 million check to settle a lawsuit brought by the SEC in response to claims GS misled clients about a mortgage derivative investment. While the funds have since been repaid, there was also the not-so-small matter of needing government bail-out funds, as well as a helping hand from Warren Buffet, to make it through the financial crisis. And a recently completed senate probe places a lot of the blame for the financial crisis squarely on the shoulders of Goldman Sachs. And finally, an announcement was made Tuesday that Goldman's clearing and execution division are facing civil fraud and related charges brought by the Commodity Futures Trading Commission (CFTC). The lawsuit alleges GS is liable for illicit clearing activities working with an as yet unnamed Broker Dealer. The Ugly By all accounts, 2010 was not a good year for GS. Profits decreased, SEC probes continued, and fines were paid. In addition, return on equity diminished to just 11.5 percent, down from over 30 percent three short years ago. But here's where it gets really ugly. With everything that has happened with GS, paying CEO Lloyd Blankfein over $19 million dollars in 2010, and soliciting shareholders for an increase in executive pay for 2011, seems entirely misguided. Needless to say, this rubbed a lot of institutional and individual investors alike the wrong way, particularly considering the source. Summary There are a lot of things not to like about GS, and the sector as a whole for that matter. However, some things must be put into perspective going forward. For example, the return on equity numbers alluded to above (11.5 percent, down from 32 percent in '08) are far better than peer averages. Earnings per share, net income and industry-leading margins should place Goldman Sachs squarely in the sights of buy-and-hold investors right now. iStockAnalyst | May 11, 2011
