Goldman mitigates risks for a winning business model
gold man Sachs (SG) is an American multinational financial services company. The banking giant operates a range of services, including investment banking, wealth management, trading and loan origination. I am bullish on the stock.
Less dependence on trading
Goldman announced that it is expanding its private management team in London, hiring 9 new managers. This is part of an ongoing effort by the company’s management to expand its paid asset management services, which could move the bank away from its reliance on trading income.
According to its third quarter earnings report, Goldman generated 47.8% of its revenue from trading. Income from asset trading dramatically increases a bank’s risk profile due to the unpredictability of its future profits.
Investors may well benefit from this strategic move, as it comes with better earnings quality and less cyclical behavior in stocks.
From an investor’s perspective, the current risk / return profile of the stock is nothing out of the ordinary. The stock beta of 1.53 means it is 1.53 times riskier to invest in Goldman stock than in the S&P 500, but over the past 5 years the stock has underperformed the cumulative index of 38.2%.
The decision to reduce the company’s risk should propel the stock’s performance as its cyclical attributes decline. In addition, investors could expect a more constant dividend; Goldman’s dividend payout ratio of 9.48% is relatively low, which could change if its earnings become more predictable.
Here we take a look at a significantly undervalued stock. Goldman’s PE ratio is trading at 37.93% and its PEG ratio of 0.03 indicates that the company’s earnings growth is 33.3 times the share price appreciation.
Another factor worth mentioning is the market’s anticipation of a rise in US interest rates in 2022. Interest rates correlate with bond yields, which usually results in higher bank stocks.
The Taking of Wall Street
Wall Street loves Goldman Sachs stocks. Out of 13 analyst notes, 11 purchases, 2 suspensions and no sales were awarded. Goldman Sachs’ average price target among Wall Street analysts is $ 464.15, which has upside potential of 19.81% for investors.
Goldman Sachs’ less reliance on trading as a source of profit will bring sustainability to its profits and lead to a better risk / return profile of its stock. In addition, the stock is considerably undervalued compared to its historical parameters.
Disclosure: At the time of publication, Steve Gray Booyens had a long position in GS.
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