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Goldman (GS) Stock Soars 60.2% in a Year: What Should Investors Do?
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Shares of The Goldman Sachs Group, Inc. (GS - Free Report) — a well-known global investment bank — have witnessed a remarkable run on the bourses, with its stock skyrocketing 60.2% in a year. This meteoric rise has outpaced the S&P 500 and also left its peers — JPMorgan & Chase (JPM - Free Report) and Morgan Stanley (MS - Free Report) — behind.
1-Year Price Performance
Image Source: Zacks Investment Research
The year has been favorable for this global investment bank as capital markets are showing signs of rebound. Investment banking (IB) business seems to have found solid ground this year. Hence, it helped GS garner record IB fees during the first half of 2024.
This led to bullish sentiments among investors as the stock is trading above its 50-day moving average. This underscores positive market sentiments and confidence in its financial health and prospects.
50-Day Moving Average
Image Source: Zacks Investment Research
Also, GS is currently trading just 3.8% off its 52-week high of $517.26 hit on Jul 31.
After such a significant rally, the question on every investor's mind is whether Goldman stock can sustain this momentum or if it is time to cash in on the gains.
Expansion in Private Equity Credit Line: A Well-Timed Step
Goldman plans to ramp up its lending services to private equity and asset managers and intends to expand internationally. This stemmed as a part of its efforts to fill the void left by the turmoil seen at regional banks in 2023 and the collapse of Credit Suisse.
The private equity market has a strong growth potential as private equity deals are expected to rise, driven by record-high fundraising. These loans are classified as short-term, typically secured by the assets of borrowing firms. Hence, these have a lesser risk attached to them. The firm’s focus on the private equity market is a strategic fit.
Goldman Sachs Asset Management, a unit of GS, intends to expand its private credit portfolio to $300 billion in five years from the current $130 billion. Once the company strengthens its operations in the United States, it plans to expand its lending business into Europe, the U.K. and Asia.
Efforts to Leverage Wall Street Operations to Drive Growth
Goldman is progressing well with its core strengths of IB and trading operations through restructuring initiatives and opportunistic acquisitions. In 2022, the company acquired NextCapital and Dutch asset manager NN Investment Partners, strengthening its capital markets business.
GS scaled back its consumer banking footprint. In first-quarter 2024, the company completed the sale of GreenSky, its home-improvement lending platform. In fourth-quarte 2023, it sold its Personal Financial Management unit. Goldman aims to cease unsecured loan offerings to consumers through its digital consumer banking platform — Marcus. In 2023, it sold substantially all of Marcus’s loan portfolio. Apart from these divestitures, the company is offloading its credit card program with General Motors.
These initiatives are likely to boost the company’s presence in overseas markets.
GS’ focus on its Wall Street operations is paying off. In 2022 and 2023, its IB revenues declined 47.9% and 15.5%, respectively, while in the first half of 2024, the metric soared nearly 27% from the first half of 2023. The upside was driven by the bounce back in global mergers and acquisitions (M&As), which led to a remarkable improvement in the industry-wide deal value and volume.
The company maintains its long-standing #1 rank in announced and completed M&As and ranked #2 in equity underwriting. A solid financial performance of the corporates, buoyant equity markets and expected rate cuts this year, along with Goldman’s leadership position, lent it an edge over its peers.
Management believes that the company is still in the early innings of the capital markets and M&A recovery. Though certain transaction volumes are still well below their 10-year averages, the company is well-positioned to benefit from a continued resurgence in the capital markets activities.
Impressive Payout to Boost Investor Confidence
Goldman rewards its shareholders handsomely. In July 2024, the company increased its quarterly dividend by 9.1% to $3 per. In the past five years, the company hiked dividends five times with an annualized growth rate of 24.42%. Currently, its payout ratio sits at 35% of earnings.
Recently, MS announced a quarterly cash dividend of 92.5 cents, marking an 8.8% hike from the prior payout. JPM announced plans to hike dividends by 8.7% to $1.25.
GS has a share repurchase program in place. In the second quarter, the company repurchased $3.5 billion of shares. Management stated that given the higher-than-expected stress capital buffer (SCB) requirement, the company plans moderate buybacks versus the levels of the second quarter.
In terms of liquidity position, as of Jun 30, 2024, GS’ cash and cash equivalents were $206 billion. The company has only $77 billion of near-term borrowings as of the same date.
The company’s capital position remains strong. The company plans to return the excess capital to its shareholders prudently.
Analysts Shows Mixed Sentiment
In the past month, the Zacks Consensus Estimate for 2024 earnings has moved downward, while 2025 earnings have moved upward.
Estimate Revision Trend
Image Source: Zacks Investment Research
GS Shares Overvalued
From a valuation standpoint, Goldman appears somewhat expensive relative to the industry. The company is currently trading at a forward 12-month P/E multiple of 12.68X, above the industry average of 10.04X.
Image Source: Zacks Investment Research
Although Goldman's solid fundamentals justify its price, investors may face negative risks if the company's future performance fails to match expectations.
What Should be Investors’ Next Step?
GS is well-positioned to expand inorganically, banking on a strong balance sheet. The company maintains investment-grade long-term debt ratings of A/A2/BBB+ and a stable outlook from Fitch Ratings, Moody’s Investors Service and Standard & Poor's, respectively., making it an attractive stock.
However, its ongoing investments in technology, market development expenses for business expansion and a rise in transaction-based compensation expenses during periods of higher client activity will likely keep the expense base elevated in the near term.
While Goldman is showcasing strong price performance, prospective investors should exercise caution. Though its efforts to refocus on core capital markets business and expansion in private credit lines provide a solid base for future growth, the interest rate cut path and escalating expenses are expected to influence GS’ financial performance greatly.
Also, GS' stretched valuation raises concerns about sustainability. Investors should consider these factors carefully and evaluate their risk tolerance before buying the GS stock.
Image: Bigstock
Goldman (GS) Stock Soars 60.2% in a Year: What Should Investors Do?
Shares of The Goldman Sachs Group, Inc. (GS - Free Report) — a well-known global investment bank — have witnessed a remarkable run on the bourses, with its stock skyrocketing 60.2% in a year. This meteoric rise has outpaced the S&P 500 and also left its peers — JPMorgan & Chase (JPM - Free Report) and Morgan Stanley (MS - Free Report) — behind.
1-Year Price Performance
The year has been favorable for this global investment bank as capital markets are showing signs of rebound. Investment banking (IB) business seems to have found solid ground this year. Hence, it helped GS garner record IB fees during the first half of 2024.
This led to bullish sentiments among investors as the stock is trading above its 50-day moving average. This underscores positive market sentiments and confidence in its financial health and prospects.
50-Day Moving Average
Also, GS is currently trading just 3.8% off its 52-week high of $517.26 hit on Jul 31.
After such a significant rally, the question on every investor's mind is whether Goldman stock can sustain this momentum or if it is time to cash in on the gains.
Expansion in Private Equity Credit Line: A Well-Timed Step
Goldman plans to ramp up its lending services to private equity and asset managers and intends to expand internationally. This stemmed as a part of its efforts to fill the void left by the turmoil seen at regional banks in 2023 and the collapse of Credit Suisse.
The private equity market has a strong growth potential as private equity deals are expected to rise, driven by record-high fundraising. These loans are classified as short-term, typically secured by the assets of borrowing firms. Hence, these have a lesser risk attached to them. The firm’s focus on the private equity market is a strategic fit.
Goldman Sachs Asset Management, a unit of GS, intends to expand its private credit portfolio to $300 billion in five years from the current $130 billion. Once the company strengthens its operations in the United States, it plans to expand its lending business into Europe, the U.K. and Asia.
Efforts to Leverage Wall Street Operations to Drive Growth
Goldman is progressing well with its core strengths of IB and trading operations through restructuring initiatives and opportunistic acquisitions. In 2022, the company acquired NextCapital and Dutch asset manager NN Investment Partners, strengthening its capital markets business.
GS scaled back its consumer banking footprint. In first-quarter 2024, the company completed the sale of GreenSky, its home-improvement lending platform. In fourth-quarte 2023, it sold its Personal Financial Management unit.
Goldman aims to cease unsecured loan offerings to consumers through its digital consumer banking platform — Marcus. In 2023, it sold substantially all of Marcus’s loan portfolio. Apart from these divestitures, the company is offloading its credit card program with General Motors.
These initiatives are likely to boost the company’s presence in overseas markets.
GS’ focus on its Wall Street operations is paying off. In 2022 and 2023, its IB revenues declined 47.9% and 15.5%, respectively, while in the first half of 2024, the metric soared nearly 27% from the first half of 2023. The upside was driven by the bounce back in global mergers and acquisitions (M&As), which led to a remarkable improvement in the industry-wide deal value and volume.
The company maintains its long-standing #1 rank in announced and completed M&As and ranked #2 in equity underwriting. A solid financial performance of the corporates, buoyant equity markets and expected rate cuts this year, along with Goldman’s leadership position, lent it an edge over its peers.
Management believes that the company is still in the early innings of the capital markets and M&A recovery. Though certain transaction volumes are still well below their 10-year averages, the company is well-positioned to benefit from a continued resurgence in the capital markets activities.
Impressive Payout to Boost Investor Confidence
Goldman rewards its shareholders handsomely. In July 2024, the company increased its quarterly dividend by 9.1% to $3 per. In the past five years, the company hiked dividends five times with an annualized growth rate of 24.42%. Currently, its payout ratio sits at 35% of earnings.
Recently, MS announced a quarterly cash dividend of 92.5 cents, marking an 8.8% hike from the prior payout. JPM announced plans to hike dividends by 8.7% to $1.25.
GS has a share repurchase program in place. In the second quarter, the company repurchased $3.5 billion of shares. Management stated that given the higher-than-expected stress capital buffer (SCB) requirement, the company plans moderate buybacks versus the levels of the second quarter.
In terms of liquidity position, as of Jun 30, 2024, GS’ cash and cash equivalents were $206 billion. The company has only $77 billion of near-term borrowings as of the same date.
The company’s capital position remains strong. The company plans to return the excess capital to its shareholders prudently.
Analysts Shows Mixed Sentiment
In the past month, the Zacks Consensus Estimate for 2024 earnings has moved downward, while 2025 earnings have moved upward.
Estimate Revision Trend
GS Shares Overvalued
From a valuation standpoint, Goldman appears somewhat expensive relative to the industry. The company is currently trading at a forward 12-month P/E multiple of 12.68X, above the industry average of 10.04X.
Although Goldman's solid fundamentals justify its price, investors may face negative risks if the company's future performance fails to match expectations.
What Should be Investors’ Next Step?
GS is well-positioned to expand inorganically, banking on a strong balance sheet. The company maintains investment-grade long-term debt ratings of A/A2/BBB+ and a stable outlook from Fitch Ratings, Moody’s Investors Service and Standard & Poor's, respectively., making it an attractive stock.
However, its ongoing investments in technology, market development expenses for business expansion and a rise in transaction-based compensation expenses during periods of higher client activity will likely keep the expense base elevated in the near term.
While Goldman is showcasing strong price performance, prospective investors should exercise caution. Though its efforts to refocus on core capital markets business and expansion in private credit lines provide a solid base for future growth, the interest rate cut path and escalating expenses are expected to influence GS’ financial performance greatly.
Also, GS' stretched valuation raises concerns about sustainability. Investors should consider these factors carefully and evaluate their risk tolerance before buying the GS stock.
Those who already have the GS stock can consider holding it, given strong fundamentals. The stock currently carries Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.