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Return on Investment Case Study
Baseman
Member Posts: 12,367
Goldman Sachs crushed Q1 2021 earnings: 18.60 actual v. 10.22 estimate.
Goldman is a Baseman fav. An iconic institution that hires smart people. These dudes know how to make $. A roque trader exposed them to litigation and the potential for heavy fines. I found a few articles where the authors laid a case for a smaller fine, somewhere between $2 and $3 billion. Not chump change but the overhang on the stock was significant. I saw an opportunity.
Banks are traditionally evaluated by their Book Value: the net difference between that company's total assets and total liabilities, where book value reflects the total value of a company's assets that shareholders of that company would receive if the company were to be liquidated.
Tangible Book Value is book value minus intangible assets (Goodwill, Trademarks etc). The recipe for Coke, while an intangible asset is very valuable. Just ask @CokeGreaterThanPepsi. A bank's intangible assets provide lower value. A name, prime branch locations, maybe some technology. Easier to duplicate than the taste of Coke.
Moving on. Goldman's legal exposure reduced their ROE (Return on Equity, the earnings/book value) to 7-9 %. Instead of buying back shares and paying dividends, they hoarded cash, in case of a massive fine. The cash while great earns a pittance. Money markets and T-Bills don't move the needle. Why buy a financial with a 7-9% ROE when JP MORGAN earns 10-13%?
I began buying GS three years ago. Starting with a small position, I added more over time when it was attractively priced. I also reinvested the dividends.
GS Price to Book Value during the period I bought.
GS P/E during the same period.
My cost basis is $209.19 (total acquisition cost / number of shares owned)
GS repurchases between ~$4B to $6B of their stock each year, net after employee stock compensation. In 2020 GS spent $1.9B, as a result of the VID
GS net common equity repurchase YOY
Share count reductions increase current shareholders piece of the pie. Even if YOY total income remains flat, as long as the company reduces the share count, the EPS increases
GS Earnings YOY and average outstanding shares.
GS settled the Malaysian matter, paying a $2.9B. With that behind them they earned a higher ROE. An emerging consumer bank (Marcus) helped.
The $18.60 GS reported today equates to a 8.9% return on my investment ($18.60/$209.19) for one quarter! 36% annualized. Pump the brakes, though. GS probably won't earn $74.40 for the year. A favorable trading environment, including higher advisory fees and facilitating debt restructuring Current '21 estimates after today are ~$42, a 20% return on my investment. More please.
As an investor I don't receive the full $18.60. I only see $1.25 for the quarterly dividend. Goldman spent $2.7B buying back shares, or $7.50 per outstanding share (360M at the beginning of the quarter) Ill benefit with higher future dividends and a greater percentage of future share buybacks. Through dividend and buybacks I received $8.75 and GS reinvested the $9.85 in the business which hopefully earns us more money down the road.
Then there is the higher stock price. If I sold now I clear 68% on my original investment plus the dividends. But why sell a good company earning a 20% ROI after ~2 years of ownership which should increase in the future? Focus on the company's financial health and future business prospects. Buy more If the price drops.
I don't consider GS a current buy or sell. I like the company and plan on keeping it.
Goldman is a Baseman fav. An iconic institution that hires smart people. These dudes know how to make $. A roque trader exposed them to litigation and the potential for heavy fines. I found a few articles where the authors laid a case for a smaller fine, somewhere between $2 and $3 billion. Not chump change but the overhang on the stock was significant. I saw an opportunity.
Banks are traditionally evaluated by their Book Value: the net difference between that company's total assets and total liabilities, where book value reflects the total value of a company's assets that shareholders of that company would receive if the company were to be liquidated.
Tangible Book Value is book value minus intangible assets (Goodwill, Trademarks etc). The recipe for Coke, while an intangible asset is very valuable. Just ask @CokeGreaterThanPepsi. A bank's intangible assets provide lower value. A name, prime branch locations, maybe some technology. Easier to duplicate than the taste of Coke.
Moving on. Goldman's legal exposure reduced their ROE (Return on Equity, the earnings/book value) to 7-9 %. Instead of buying back shares and paying dividends, they hoarded cash, in case of a massive fine. The cash while great earns a pittance. Money markets and T-Bills don't move the needle. Why buy a financial with a 7-9% ROE when JP MORGAN earns 10-13%?
I began buying GS three years ago. Starting with a small position, I added more over time when it was attractively priced. I also reinvested the dividends.
GS Price to Book Value during the period I bought.
GS P/E during the same period.
My cost basis is $209.19 (total acquisition cost / number of shares owned)
GS repurchases between ~$4B to $6B of their stock each year, net after employee stock compensation. In 2020 GS spent $1.9B, as a result of the VID
GS net common equity repurchase YOY
Share count reductions increase current shareholders piece of the pie. Even if YOY total income remains flat, as long as the company reduces the share count, the EPS increases
GS Earnings YOY and average outstanding shares.
GS settled the Malaysian matter, paying a $2.9B. With that behind them they earned a higher ROE. An emerging consumer bank (Marcus) helped.
The $18.60 GS reported today equates to a 8.9% return on my investment ($18.60/$209.19) for one quarter! 36% annualized. Pump the brakes, though. GS probably won't earn $74.40 for the year. A favorable trading environment, including higher advisory fees and facilitating debt restructuring Current '21 estimates after today are ~$42, a 20% return on my investment. More please.
As an investor I don't receive the full $18.60. I only see $1.25 for the quarterly dividend. Goldman spent $2.7B buying back shares, or $7.50 per outstanding share (360M at the beginning of the quarter) Ill benefit with higher future dividends and a greater percentage of future share buybacks. Through dividend and buybacks I received $8.75 and GS reinvested the $9.85 in the business which hopefully earns us more money down the road.
Then there is the higher stock price. If I sold now I clear 68% on my original investment plus the dividends. But why sell a good company earning a 20% ROI after ~2 years of ownership which should increase in the future? Focus on the company's financial health and future business prospects. Buy more If the price drops.
I don't consider GS a current buy or sell. I like the company and plan on keeping it.
Comments
I mean what stock is a current buy?
Watchlist: Google at $2,150. QQQM (includes Google) below $130. Dominos Pizza below $375.
A small position (1-2% of my portfolio) in COIN below $300
Everything else is expensive, 10 - 20% +.Will re-evaluate after earnings
My middle daughter follows weed companies. Crowded space and off my radar.
Sorry, That doesn't help you.
Two things: they do know how to make money - in fact, it's all they know how to do - and they hire the very smartest people. McKinsey is the only other place I know who is as particular as is Goldman. They really do get the 1%.
But then I also go back to how I, and most others, viewed Lehman. They are almost too complex. It's harder to understand what's really going on at Goldman than it is other companies just by reading their financials. The nature of the iBank is, year over year over year making money hand over fist, then, BOOM, something happens, massive liquidity crisis, and they either can or cannot bridge the gap.
Lehman was a lynch pin event to 2008. They are the primary reason that the Reserve MM Funds broke the buck. They had circled the drain before, scrambling to raise cash any way they could. In the end, they defaulted on their short-term debt obligations and POOF! No more Lehman.
I suppose we can say, Goldman is no Lehman. I suppose.
Banks can't leverage like they used to. Basil, Tier 1 and all that shit. But it's good, so far and seems to work.
If I recall correctly Hank Paulson forced Goldman to take money during the crisis. Out of all the banks -- traditional and investment -- Goldman (I think) was in the best shape.
I'm told they also were betting heavy against the mortgage bonds and shorting the shit out of AIG. I don't have a problem with this. There are two sides to every trade.
Whatever the case, I like Goldman which means it will probably nose dive and i'll lose my $. For now, I'm enjoying my astute (just ask me) investment.
That is all.