Return on Investment Case Study

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.