Value investors often find themselves looking at relatively obscure companies or making contrarian bets during adverse market conditions. Sometimes, though, deep value can be found in well known large cap companies.
With the state of the global economy still largely in flux and an uncertain Fed at the helm in regards to interest rates, investors are looking for good companies that are able to weather difficult economic environments and still produce profits. For the investment banking industry, the current environment of volatility and the threat of rising rates in the future is actually a recipe for success.
While investment banks have slipped this past summer, there's now a prime opportunity to buy into this sector at discounted prices. One staple of the industry looks too undervalued right now to ignore and could deliver investors outsized gains over the next few months.
An investment banking dynasty for sale
Goldman Sachs (GS) is one of the largest and most well-respected investment banks on Wall Street with a market cap of $80 billion. Long time CEO and Chairman Lloyd Blankfein is a legend among financial institutions navigating Goldman through decades of growth. The company has managed to stay one of the most elite banking institutions following the sub-prime mortgage crisis in 2008 and has largely kept its reputation unvarnished through it all.
Recently, though, Goldman hasn't performed up to expectations with two missed earnings reports in a row. The impact of a slowing underwriting segment due to weakness in the global economy and the worldwide drag on commodity prices hurt the company's revenues more than analysts had anticipated.
The investment banking giant has improved efficiency compared to its peers though with operating expenses dropping 34% in the third quarter and compensation expenses falling 38%. The stock looks cheap relative to the industry average as well trading at 12 times earnings compared to 20 while long-term growth is expected to be nearly 16% while the industry average is around 7.5%. The stock also comes with a conservative dividend yield of 1.40% while the company repurchased 5.4 shares of common stock during the third quarter which should continue into the fourth and help provide some downside protection.
Goldman's chart gives another reason to be bullish.
Chart courtesy of StockCharts.com
Year-to-date, Goldman's stock price has basically mirrored the performance of the S&P 500 showing a loss of about 3%, but notice how the stock has begun to rally. It recently closed north of the 50-day moving average indicating growing positive momentum and sending a bullish signal to investors.
Goldman's stock was upgraded this week by Morgan Stanley from "equal-weight" to "overweight" citing its attractive valuation levels and overall health of the company. Goldman's first quarter 2016 revenues are estimated to increase by 50% and earnings by 75% from the third quarter 2015 as well.
Given a fair P/E estimate and full year earnings, this stock should be trading at around $205 – a discount of about 10% from its current price.
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INO.com Contributor - Equities
Disclosure: This contributor does not own any stocks mentioned in this article. This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.