State of Conviction: GS

Periodically I review the "state of my conviction list" which means I discuss the equities that I am currently recommending on my Conviction List.  Discussions will primarily revolve around valuation, qualitative data, news, earnings, current and proposed target price.  Keep in mind that I might review my entire list of stocks or selectively choose a certain stock stock to discuss.       

Goldman Sachs – I recommended that investors buy this equity at the $180 mark while placing a $230 price target on the stock.  My argument at the time was that Goldman is a "best of breed firm" that “prints” money like no other going concern on Wall Street.  Trading at 9 times next year’s earnings, it was my thought, at the time, that I really couldn't’t see the stock price going much lower than $180.  Amid the recently volatility, the question I get these days ...."Do you still feel the same about GS?"  Allow me to state in a resounding tone:  YES! 

Operationally, the firm has a long history of superb performance.  Yes, I know investors are worried about tomorrow and not about yesterday; but if we want to have an idea of how they will perform in the future then we must see what they have done in the past to achieve superior returns.  This firm’s culture demands excellence year-over-year and I suspect the same will apply in 2008.  With that said, here are a few highlights from last year:

1. Goldman Sach's shareholder equity CAGR = 20%.  In 2007, shareholder equity was at an all-time high for the firm at $42.8 billion all while returning $9.6 billion in capital.

2. Since 1999, their growth in book value CAGR = 20%.   Shareholders have seen book value per common share rise from $20.94 in 1999 to $90.43 in 2007.

3. In 2007, net revenues clicked in at $46.0 billion (a 22% year-over-year rise) and net earnings $11.6 billion (also a 22% year-over-year rise).

4. The firm repurchased $9.0 billion in shares outstanding last year.

The key question at this point: “Is this sustainable?”  In fact, I think this question has been asked every year since 1999 when the firm first went public.  The growth rate (g) for this firm, that was founded in 1869, is absolutely impressive and, to an extent, surreal.  Name me another firm, which has been in business for over 100 years, that sports these types of metrics.  Simply put, you can’t. 

Near term, we will have a much better idea of the firm's recent performance in mid-March when they announce earnings.  I am thinking that the first quarter will give us a proxy of what to expect moving forward in 2008.  I personally can’t wait…With that, I stick to my $230 price target! 

Goldman Sachs Related Links

Firm History

http://en.wikipedia.org/wiki/Goldman_Sachs

Press Release for Upcoming Earnings Release

http://www2.goldmansachs.com/our-firm/press/press-releases/current/2008-q1-call.html

Goldman Sachs Presentation at the Credit Suisse Financial Conference

http://www2.goldmansachs.com/our-firm/investors/presentations/current/c-s-presentation.pdf