We’re Buying This Blue Chip Investment Bank on a Pullback
Goldman Sachs has pulled back to a technically favorable level. Here’s what to know.
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Earlier this week, at Barclays Global Financial Services Conference, Goldman Sachs Chairman and CEO David Solomon appeared on behalf of the investment banking giant. Solomon’s comments sent Goldman’s shares tumbling by about 4%.
Solomon noted that Goldman was seeing weakness in several areas of its business. Softness in Goldman’s fixed income, commodities, and currency trading businesses all were likely to weigh on the company’s current-quarter results.
Fortunately, equity trading remained a bright spot.
At the same time, Solomon reported higher expenses due to elevated client activity. Also, the company has increased spending on its internal technology.
An Outstanding Performer
Goldman Sachs has been an outstanding performer. Over the past five years, the stock has gained about 143%.
Just two months ago, Goldman Sachs shares reached an all-time closing high of $1,152 (point A in chart below).
Since then, the shares have lost about 18%. The past week has been particularly rough, with Goldman losing nearly 8% over five trading days.
Technical Support
Goldman Sachs has pulled back to its 200-day moving average (red line, point B). A pullback to that key indicator earlier this year launched the stock sharply higher (point C). The stock rallied by over 45% in just four months, as it ran from the moving average to its all-time high.
Will Goldman bounce from its 200-day MA again? This could be an opportunity to own the venerable investment bank, as the temporary circumstances are to blame for its current weakness.
We’re buying shares of Goldman Sachs on its 200-day MA, which is still trending higher. We’ll take a loss on the trade if Goldman falls below its year-to-date low from this spring (point C).
I have no price target for this trade at this time. Goldman Sachs is a blue chip company, and if the trade works out directionally, I plan to keep it for more than just a quick profit.
Temporary Issues
Regarding Goldman’s higher spending, I don’t see increased activity on the part of the company’s clients as a long-term negative. Nor do I see a one-time increase in the company’s internal technology spending as a negative beyond the current quarter.
As for softness in the fixed income, commodities, and currency businesses, Goldman has been in the banking industry since 1869. Surely they’ve had a few rough trading quarters over those many years, but just like the increase in spending, this appears to be a temporary issue.
Bottom Line
I see the recent weakness in shares of Goldman Sachs as temporary. That weakness is creating an opportunity to own a blue chip investment bank at an 18% discount to its recent highs.
At the time of publication, Ponsi was long GS.
