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Bull of the Day: Goldman Sachs Group (GS)

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In the spirit of full disclosure, I have to admit that for a long time during my professional trading career, I had an active relationship with today’s Bull of the Day – Goldman Sachs Group (GS - Free Report) . Goldman had purchased the Chicago-based clearing firm that handled our firm’s accounts and positions, renaming the new division “Goldman Sachs Execution and Clearing” – GCEC for short - and my experiences with them were overwhelmingly positive.

Though our options market making business occupied a somewhat obscure corner of the financial markets, I always felt that each of the people from Goldman who we interacted with understood exactly what we needed and frequently helped us achieve our goals.

I no longer have any business relationship with Goldman – or any sort of conflict whatsoever – but I was happy to see that after a difficult stretch for the banking and finance industry as a whole, Goldman is back on top with a Zacks Rank #1 (Strong Buy). Thanks to a culture that has evolved with the times – but also never deviated from core principles of honesty and integrity, the company that Marcus Goldman and Samuel Sachs founded in New York shortly after the Civil War has been an industry leader in an increasingly diverse set of businesses for 150 years.

A former Goldman Sachs managing director was renowned for imploring his staff to, “be greedy, but be long-term greedy.” That’s great advice in almost any business pursuit. The focus should always be profitability, but it’s also important to resist the temptation to reach for quick gains that come at the expense of establishing partnerships and lines of business that will bear fruit for years or decades into the future.

Because of that sort of long-term thinking, Goldman is truly a “money-machine” through all sorts of economic conditions. In the most recent quarter – obviously a tough period for many businesses – Goldman posted net profits of $9.68/share. That exceeded the Zacks Consensus Earnings Estimate by more than 70% and importantly, it reassured the investment community that Goldman is still capable of churning out big results, even in an atmosphere of low interest rates and significant business challenges.

Thanks in part to that outstanding number, the consensus estimate for full-year earnings have risen from $13.49/share all the way to $19.08/share over the last 60 days.

The full-year 2021 estimate went from $22.73/share to $24.37/share over the same period despite an expectation for slightly lower total revenues. It’s important to keep in mind that “slightly lower revenues” still means more than $38 billion. When you look at the numbers for a huge, diversified company like Goldman, sometime you end up doing a double-take because the figures are so big – especially when compared to smaller companies that trade at sky-high multiples and for whom beating the estimates by a few cents is a major achievement, even as Goldman beats by dollars.

Of course, large banking and finance institutions tend to trade an much lower price-to-earnings valuations than the broad indices. The relative stability of revenue streams and net earnings and huge aoounts of capital involved mean that a huge unexpected growth surge is fairly unlikely. As an investor, what you might give up in growth potential you get back in consistency.

With a forward 12-month P/E ratio of just 12.17X, Goldman is priced more attractively than the industry average of 13.4X and the S&P 500 as a whole at 28X.

Owning a big investment bank like Goldman Sachs might not be nearly as exciting as those companies that make electric vehicles, fancy home exercise equipment or hamburgers made out of vegetables, but thanks to rising estimates and a history of steady progress through even the roughest seas – as well as a juicy 2.15% dividend yield – Goldman is one of those core holdings that let’s you sleep easily at night.

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