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Thursday, January 17, 2013


A few months ago I was really into the banks to take advantage of the below-discount-to-tangible-book. As the economy rallied, and housing held up, the value of the banks were realized. The few major banks trading below book are BAC and C. (As the economy continues to improve, value of these companies will also approach book.)

Most major banks are trading slightly above book, the valuation method turns to earnings.  Today, GS brought the earnings. But just because this quarter was kick-ass, how should GS be valued?

Here is what I'm thinking:

1. Despite the solid earnings, a predictable profit center is lacking or yet to be broadly realized.  This may keep the trailing PE to the lower side.  A look at the last 10 years gives a skewed picture for bank multiples (for obvious reasons). During the ramp-up of the housing bubble, banks had accelerated earnings power due to pumping out MBS securitization. As the underwriting started to level off, so did the multiples. As more uncertainty emerged to their earnings power, the multiple declined further. (All hell broke loose with the financial crisis, and trailing PE past 2008-to-present were omitted from this assessment. IMO, the time frame fits with the current environment could be between 2005 and 2007. This would assume the market will allow the banks to have a multiple between 9.5 - to - 11.5.

2. Looking forward, analyst will most likely be raising their numbers to reflect the favorable compensation ratio of 37% instead of 42%. But the comparisons may still be tough.  Next quarter, GS is currently projected to produce an EPS of $3.78. This will be replacing an EPS of $3.92.  Even with potential upgrades, the trailing total EPS will be flat. (Not justifying a higher trailing multiple.)

The trailing 12 month EPS is 14.15. With a trailing PE between 9.5-to-11.5, the stock can potentially trade between $134 -to- $162.

3. Technically, the stock has set out for a new trading range.

Clearly, the chart is bullish. But I do not like to chase.  I am patiently waiting for a re-entery. As the sentiment begins to ease, I am expecting GS to retest its 28SMA before pushing upward.

Although an aggressive trader would enter on any weakness between the intraday price action and the 10 SMA, with a tight stop just below the 10 SMA. Once the 10 SMA is breached, GS will most likely test the 28SMA.  (I tried entering on weakness today, and execute this strategy, but degree of intraday weakness did not entice me to take on the trade.)

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