Goldman Rules the Street again, Earnings top Expectations

Goldman Sachs (GS), the biggest of the Investment Banks, reported earnings on the heels of a Lehman Brothers (LEH) beat and a Morgan Stanley (MS) fall, and did it ever show who rules Wall Street. Goldman reported earnings of $6.13/share versus the average estimate of $4.35 and a high estimate of $5.08. Now that's an earnings beat!

Goldman was all over the headlines during the sub-prime meltdown for its flagship Alpha Fund and its negative performance, but the trading giant turned around those losses and made a killing betting against mortgages. The results, net income of $2.85Billion, a 79% increase, revenue of $12.3Billion, a 63% increase, and the undoubted respect of Wall Street.

Bear Stearns (BSC) did not fare as well, seeing earnings slide 61% year over year. Morgan Stanley saw declines also. Goldman showcased its ability to react to trouble and create investment opportunities out of volatility and panic, particularly in this quarter. Shares have been rising since lows around $170 and shot up to $210 as the numbers were announced. However profit taking and general market trends dragged Goldman back down to $203.

I previously wrote a couple things about Goldman Sachs with the latest being an August 9th article (Link) regarding the Alpha Fund losses. Within this piece I weighed the negatives and the potential positives, stating that in fact I think Goldman Sachs had found a bottom. Additionally, I outlined that this earnings number would be crucial in sending GS in the right direction and I ended by suggesting that "the plan that Goldman has in motion should lead it to calmer seas well ahead"

As for those losses. Goldman did book about $1.7Billion in credit losses but more than made up for that in other trading and underwriting business. In fact equity trading revenue more than doubled to $3.1Billion. In asset-management, even though a couple big funds lost more than 20%, Goldman was able to compensate by increasing management fees by up to 40%. When you can increase your fees by almost half when you're doing poorly, you've got what's called Business Clout! Something that simply can not be challenged by every other Investment Bank on the street.

It appears that Goldman has found these calmer seas even quicker than I would have anticipated and now I don't think that all time highs during the holiday run up are out of the question. A company this effective at profiting from market turmoil, slowdown fears and general economic panic, is something worth owning. At around $200 it may just be a very handsome Christmas steal also.

Disclosure: Author is long GS

Goldman's Flagship Alpha Fund Showing Problem Signs

Markets, domestic and abroad went lower in trading Thursday Aug 9th as renewed credit fears swept in again. The European Central Bank officially said that it injected almost 100Billion Euros into Money Markets to provide liquidity. This news only raised concerns of credit tightening and was compounded negatively by reports of more hedge fund losses.

BNP Parisbas, the French-based global financial firm officially suspended 3 of its funds due to losses and exposure to the American sub-prime industry. Adding to that were persisting rumors of cracks in the armor at Goldman Sachs (GS).

Goldman's flagship Alpha fund reportedly lost 8% in one week in July and now stands at -16% in year to date performance. Talk amongst traders began yesterday that GS would have an after-market announcement regarding concerns in fund operations. This quickly turned the market lower, but a denial from Goldman Sachs sent American markets back to near highs of yesterday's session. Further reports today quantified Alpha Fund losses and required the firm to respond with the poignant "business as usual at Alpha" rebuttal. Rumors persisted that the fund was liquidating assets in various risky investments in order to stabilize its major fund. The Alpha fund has a history of successful performance but Goldman's consecutive earnings reports showed steep falls in asset management incentive fees. A sign of uneasiness for the investment bank not to be taken lightly by traders. The comparisons come against a very strong 2006 year for the investment firm and industry as a whole, so these numbers have to compared more closely to historic levels. Even so, a troubling trend is certainly forming.

Is this the time to jump out of the best investment bank on the market? While the stock may be stagnant or drifting slightly lower during the panic of the sub-prime meltdown, it is till a top tier company sporting very low P/E and PEG ratios. Goldman just won a bid for ownership of large portions of toll roads in Mexico for an astonishing 30 years. It has gotten approval from China to purchase a 12% stake in Chengdu Yangzhiguang Industrial Co., a tool making company, and it just agreed to purchase Nursefinders Inc., a health-care staffing organization. Clearly Goldman is diversifying its investment strategies for the long term, and this is a positive thing for the company and will be a good thing for investors down the road.

Goldman's next earnings report will be crucial, as a slowdown in Mergers & Acquisitions activity and the fall out from more sub-prime sector losses will weigh on all the investment banks. It will be hard for GS to get close to all-time highs of $230 in the near term as the growth story is being silenced by credit worries. However it seems as though the bottom is near and within the next few months buying opportunities could be plentiful for longer term investors.

Those holding may feel some pain during this storm as losses are realized throughout the industry but the plan that Goldman has in motion should lead it to calmer seas well ahead.

Disclosure: Author is long GS