Goldman Sachs: Looks Unstoppable
Next week, Goldman Sachs reports its final results for fiscal 2006, and there's strong reason to expect to see a humdinger. The rush of mergers, takeovers, privatizations, spinoffs, initial public offerings, debt underwritings, and other deals is golden for investment bankers. Goldman (symbol GS) is the emperor of this empire, the king of the kingdom. Its 33% market share in mergers and acquisitions is first, and its growth rate in other businesses is impressive, as is its performance in trading and investing. The actual numbers are meaningful only to statistics nerds, but the measurements point to accelerating growth. No wonder Goldman's stock has marched from $150 to $200 since September. Now researchers at CIBC, to name one group of admirers, have just slapped a "medium-term" target price on the stock of $250.
The atmosphere surrounding this American idol is so pervasive that if the stock hits $250 soon, chances are that the same forecasters will urge you to hang on for $300. They almost certainly will if the deal-making climate continues as is, fueled by low interest rates, high stock valuations that make shares a rich currency in buyouts, and the vast amount of cash in corporate hands. Only a sudden economic downturn, a series of breathtaking trading breakdowns, or a Federal Reserve interest rate surprise would seem to be in Goldman's way. A $5 billion increase in compensation to its employees in 2006 may be eye-opening, but at least the people getting all this money have delivered. At 27% of revenues, 2006 compensation is actually down from 30% in the year previous.
All this makes it a sacrilege to imagine any competitor's analyst expressing caution about GS. Independent researchers such as Standard Poor's, Ned Davis and Argus also recommend the stock enthusiastically.
Still, a share price of $250 anytime soon is hardly a lock (the stock closed December 6 at $205.00, up $3.39, or 1.7%, for the day). Analysts are actually looking for earnings to drop next year, to $17.72 per share, down from an expected $18.93 a share for the year that ended in November. True, Goldman has a penchant for grossly outperforming earnings forecasts. But based on, say, $18 in earnings, you'd need a price-earnings of 14 to reach $250. That may seem low for an institution bearing the stature of Goldman, but it is in fact at the high end of Goldman's historical P/E range of 12 to 15 P/E. On a price-to-book-value basis, $250 also seems an ambitious target for 2007. If the pace of MA remains frantic, the market may play along. If deal-making slows down, so will the stock. But it will just take longer to get where it is inexorably headed, which is higher and higher as time goes by.
So here's a tip: If you have a hole in your portfolio for a financial stock, consider buying Goldman Sachs. This is one of those rare stocks that never breaks down, unless you count a sluggish period during the recession year of 2002. Immediately after 9/11, when you might have been forgiven for avoiding Wall Street stocks, GS shares bounced strongly -- and they didn't collapse all that much to start with despite the closeness of the attacks to Wall Street. Looking back, the time to buy Goldman was when it went public in May 1999 and finished its first day of trading at $70. There hasn't been a good time to sell it -- or a reason to -- ever since. You don't need hero-worshiping analysts or jealous competitors to say so. You just have to know that the stock market truly does reward excellence.