Goldman Sachs: A 5-STAR Favorite in Finance

10/07/2020 5:00 am EST


Kenneth Leon

Director of Equity Research, CFRA Research

Our latest Focus Stock is Goldman Sachs Group (GS), which carries CFRA's highest investment recommendation of 5-STARS, or Strong Buy, notes analyst Kenneth Leon in CFRA Research's flagship newsletter The Outlook.

We believe the shares present an enhanced buying opportunity, given its 17% year-to-date share price decline and our confidence in Goldman Sach's underlying business.

The company fits our investment strategy, favoring a large global bank with a higher concentration in the capital markets and less exposure to consumer and commercial loans, as we have confidence in the 2020-2021 outlook for investment banking, asset/wealth management, trading, and other capital market areas.

We think a low rate environment leads to lower cost of capital and higher risk-taking by companies, which bodes well for GS as the leading investment banker.

In our opinion, the Fed is not likely to raise the federal funds rate for perhaps two to three years. Putting these two macro drivers together, we see GS shares outperforming large banks over the next twelve months.

With an improving global economy, we predict M&A — Goldman Sach's only major business unit that declined — is likely to improve from an 11% revenue decline in Q2 2020.

Fixed income, currencies, and commodities (FICC) trading rose 150%, while equities were up 43%, with strength in derivatives and cash equities. The exceptional performance in FICC and equities came from high levels of client activity.

GS is the go-to firm for expertise in risk intermediation expertise, using its balance sheet on behalf of clients in volatile markets like during a pandemic.

The retail market is a new opportunity that is part of the firm's corporate strategy initiated by a new senior management team that took over the company over a year ago. Goldman Sach's is also building out its Wealth Management platform, as it is investing more to grow its ultra high-net-worth franchise.

Technology is another area of great focus, where more than 35% of total employees are dedicated to either front office platforms to enhance the client experience, or back-office processing to support services. We see continued focus on organizational and process efficiency to reach efficiency ratios near or just below 60%.

Our 12-month target price of $245 is based on a forward P/E of 10.6x our 2021 earnings estimate, above the 5-year historical average at 10.3x.

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