At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." Today, we'll show you whether those bigwigs actually know what they're talking about. To help, we've enlisted Motley Fool CAPS to track the long-term performance of Wall Street's best and worst.
And speaking of the worst...
Thursday was a bad day for Goldman Sachs (NYS: GS) shareholders. First the New York State Banking Department forced the banker to write down $53 million worth of its New York state mortgage assets. Then, the Federal Reserve announced it was sanctioning the company for "robo-signing" infractions at its Litton mortgage servicing company -- even after Goldman sold the subsidiary to Ocwen Financial (NYS: OCN) -- and will require Goldman to compensate any homeowners injured by its former subsidiary's actions. Then, as a final insult on top of the financial injury sustained, Goldman found its stock downgraded ... by tiny NYC broker ISI Group.
According to ISI, Goldman Sachs is no longer a stock worth buying, because it's about to report "very weak [earnings] in the second half of this year ... 3Q and 4Q consensus EPS are way too high at $2.71 and $4.48, respectively." As a result: "there is nothing to drive the stock higher for the rest of this year."
And it gets worse. 2011 won't be the only lean year for Goldman, according to ISI. In fact, "Goldman's EPS will come in well below consensus estimates in both 2012 and 2013" as well.
Indeed. If ISI is right about this, it's going to come as a major surprise to investors who've been expecting Goldman to earn nearly $11 per share this year, grow that number 50% to $16.50 in 2012 -- and then keep on growing, averaging 9% better earnings each year from now through 2016.
Now, the news isn't all bad. There is some hope for Goldman Sachs investors yet, and it comes in the form of ISI's, shall we say, less than stellar reputation for guessing right on its picks. The analyst has been making public predictions on Briefing.com for only about a year now, but so far its record has been anything but enviable -- 33% accuracy on its picks, with the average pick underperforming the S&P 500 by nearly 6 percentage points. That's bad enough to put ISI in the lowest tier of analysts we track here on CAPS -- one of the worst analysts Wall Street has to offer. For this reason, if you own Goldman Sachs stock today, and choose to ignore ISI's warnings, I can't say I blame you.
But I'm not ignoring the warning.
Goldman Sachs: Would you buy these numbers?
Even the proverbial stopped clock is right twice a day. ISI could be right about Goldman, even if it's wrong twice as often as right about everything else. But honestly, when I look at Goldman stock today, it doesn't matter to me whether ISI is right or wrong about the profits projections for 2011, 2012, or 2013. Goldman stock looks expensive to me even if the bank manages to hit every target the Street has set for it, and then some.
At 10.5 times earnings, Goldman already looks pricey relative to the 9% consensus growth rate. But it's also pricey relative to the competition. HBSC (NYS: HBC) shares cost only 10 times earnings after all. Citigroup (NYS: C) can be had for less than nine times earnings, while Wells Fargo (NYS: WFC) costs only a little bit more than nine times. Why, JPMorgan Chase (NYS: JPM) itself -- arguably best in class in big banking today -- costs just 7.4 times earnings.
Whether you think ISI Group is probably right about Goldman's impending profit shortfall, there seems to me no reason to take the risk today. With so many better bargains in banking available, there's simply no reason to buy Goldman Sachs at all.
Where are the best bargains in banking? We've got one of them in this free report right here -- and four other attractive ideas elsewhere in the economy as an added bonus.
At the time thisarticle was published
Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.