3 trades to take advantage of weakness in Goldman Sachs shares as rate hikes loom

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  • Shares of banking giant Goldman Sachs have lost 8.5% since the start of 2022
  • Missed fourth quarter revenue estimates
  • Long-term investors may consider buying stocks at current levels

Shares of global investment bank Goldman Sachs (NYSE:) have been weak since the mid-January release. So far this year, the stock is down 8.48%. Yet, over the past 12 months, stocks have gained 9.6%.

By comparison, the — the mega-cap 30-component index that includes GS — is down 6.3% year-to-date, but up 10.0% last year. Meanwhile, the , which has gained 16.8% in the past 52 weeks, has lost 2.7% since January.

On November 2, 2021, GS shares broke above $426 to hit an all-time high. Now, however, they are changing hands for $350.12. The stock’s 52-week range has been $316.46-$426.16, while the market capitalization (cap) stands at $117.2 billion.

Despite the recent price decline, Goldman Sachs bulls might consider investing around current levels. Here’s why:

Where is recent income coming from

In terms of global revenue among investment banks, JPMorgan Chase (NYSE:) ranks first with a market share of 9.6%. Next come Goldman Sachs (9.0%), Morgan Stanley (NYSE:) with 6.7% and Bank of America (NYSE:) with 6.4%.

When we look at the mergers and acquisitions (M&A) ranking, Goldman Sachs leads JPM, followed by MS, which is why Wall Street pays close attention to the quarterly reports of these global giants.

Goldman Sachs released its fourth quarter financial statements on January 18. Revenue was $12.64 billion, an 8% increase year over year (YoY). The bank reports income in four segments:

  • Global Markets (37% of revenue, split between equities and fixed income, currencies and commodities, FICC);
  • Asset management (25% of revenue);
  • Investment banking (25% of turnover); and
  • Consumer and Wealth Management (13%).

Investors noted that higher net income in the Investment Banking and Consumer & Wealth Management segments partially offset the decline in Asset Management and Global Markets.

Diluted earnings per share for the period were $10.81, compared to $12.08 a year ago. Analysts were looking for earnings of $11.76 per share. The pressure on net income was due to higher expenses as well as lower trading revenue.

Annualized return on equity (ROE) was 15.6% for the quarter, but 23% for 2021. Many of our readers know that investors view ROE as an important measure of a bank’s profitability. Metrics of InvestPro suggest that Goldman Sachs has a higher ROE than its peers (15.9%).

On the results, CEO David M. Solomon pointed out that 2021 had been a banner year for the banking giant. In the meantime, management’s medium-term (approximately 3 years) ROE target for the entire company is 14-16%.

Prior to the quarterly earnings release, the stock was around $380. But now it is trading slightly above $350. The current price supports a dividend yield of nearly 2.3%.

What to expect from Goldman Sachs stock

Among 30 analysts interviewed by invest.comthe GS stock has an “outperform” rating.

Source: Investing.com

Wall Street also has a 12-month median price target of $434.76 for the stock, implying an increase of more than 24% from current levels. The 12-month price range currently sits between $189 and $546.

Similarly, under a number of valuation models, such as those that might consider P/E or P/S multiples or terminal values, the average fair value of Goldman Sachs stock through InvestPro amounts to $436.58. In other words, the fundamental valuation also suggests that stocks could rise almost 25%.

We can also look at the financial health of Goldman Sachs stock, determined by ranking over 100 factors against its financial industry peers. For example, in terms of growth, profit, relative value and price momentum, it scores 3 out of 5. Its overall score of 3 points is a good performance ranking.

Currently, the P/E, P/B and P/S ratios for GS are 5.5x, 1.2x and 2.0x. Comparable metrics for peers are 10.1x, 1.8x, and 1.7x. These numbers suggest that after the recent decline, Goldman Sachs shares offer better value than they did several months ago.

We expect Goldman Sachs shares to build a base between $340 and $360 in the coming weeks. Subsequently, stocks could potentially start a new stage.

Adding GS stocks to portfolios

Goldman bulls who aren’t concerned about short-term volatility might consider investing now. Their target price would be $434.76, according to analyst forecasts.

Alternatively, investors could consider buying an exchange-traded fund (ETF) that holds GS shares as an asset. Examples include:

  • iShares US Brokers-Dealers & Securities Exchanges ETF (NYSE:)
  • SPDR Dow Jones Industrial Average ETF Trust (NYSE:)
  • First Trust Dow 30 Equal Weight ETF (NYSE:)
  • Selected Financial Sector SPDR® Funds (NYSE:)
  • Invesco S&P 500® Momentum ETF (NYSE:)

Finally, those expecting Goldman Sachs stock to rebound in the coming weeks might consider setting up a bullish buy spread.

Most options strategies are not suitable for all retail investors. Therefore, the following discussion of GS stocks is offered for educational purposes and not as an actual strategy for the average retail investor to follow.

Bull Call Spread on Goldman Sachs stock

Pricing at time of writing: $350.12

In a bullish call spread, a trader has a long call with a lower strike price and a short call with a higher strike price. Both legs of the trade have the same underlying stock (i.e. Goldman Sachs) and the same expiration date.

The trader wants the price of GS stock to rise. In a bullish buy spread, the levels of potential profit and potential loss are limited. The transaction is established for a net cost (or net debit), which represents the maximum loss.

Today’s Bullish Call Spread trade is to buy the 360 ​​Strike Call expiring May 20 for $14.80 and sell the 370 Strike Call for $10.90. Buying this buy spread costs the investor around $3.90 or $390 per contract, which is also the maximum risk for this trade.

It should be noted that the trader could easily lose this amount if the position is held until expiry and both legs expire worthless, i.e. if the GS stock price at the expiry is lower than the strike price of the long call (or $360 in our example).

To calculate the maximum potential gain, one can subtract the premium paid (or $3.90) from the difference between the two strikes (or $10.00), and multiply the result by 100. In other words: ( $10.00 – $3.90) x 100 = $610.

The trader will make this maximum profit if the Goldman Sachs stock price is at or above the short call strike price (higher strike price) at expiration (or $370 in our example).

Conclusion

Since November 2021, Goldman Sachs stock has been under significant pressure. Still, the fall has improved the margin of safety for investors who may consider buying soon.

Alternatively, experienced traders could also set up options trading to benefit from any potential rise in the price of GS stock.

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