When earnings come out, investors and traders often make buy, sell, or hold decisions based on the stock’s reaction to headline earnings metrics, but a deeper look into earnings numbers is always warranted.
And right now, a perfect object lesson on why you should look past the surface is happening right now with Goldman Sachs Group Inc (GS), which saw a pretty large pop after an earnings report that looked abysmal. Let me walk you through what happened.
First of all, before earnings “drop,” it’s instructive to follow consensus estimates for what they might be, especially if the company’s management is guiding analysts’ estimates.
In the case of Goldman, management was practically announcing that they were expecting bad numbers. So, analysts started lowering their earnings estimates weeks before they dropped.
How’s that instructive? Interestingly, it’s not so much what you’d think, which is if management is warning about bad numbers the stock will likely get hit. It’s a telegraph to analysts not investors, to lower their estimates, maybe by a lot. Why? To make consensus estimates easier to beat. That’s why.
And that’s exactly what happened to Goldman. Analysts hammered down their estimates and Goldman, with even worse than consensus estimates results, saw their stock rise, not fall, about 7% on the week.
That game is an old one, and firms like Goldman know exactly how to play it. Of course, the narrative they spun was about cleaning up their mistakes of the recent past (and boy, were they ever big mistakes) and looking to the future.
The rounded-down view of Goldman’s numbers told the story of how lame their “experiment” (which is what they’re calling it now) in retail banking was. Under CEO David Solomon Goldman, they plunged head-first into the retail space a few years ago, looking to open retail checking accounts, savings accounts, and offer loans and banking and lending platforms commensurate with what other retail-oriented firms were doing.
They started Marcus as a retail access point into the storied Goldman name. And in 2021 they bought an installment lending platform called Greensky for $2.2 billion.
Well, in the second quarter they sold most of their Marcus portfolio and sold Greensky. They took a $1.1 billion impairment charge on the ill-fated business, including a write-down of more than $750 million on Greensky.
Investment banking fees were down 20%. Net interest income was down 2%. Earnings per share for the quarter came in at $3.09, down a whopping 60.4% from the year-ago quarter.
Expenses were 16% higher in the quarter and operating expenses rose 12%.
And they took a $403 million loss on equity investments attributable to property.
Pretty bad, all around. In fact, the only bright spot was equity trading which saw revenue up 20%.
So, why did the stock pop higher?
One reason is the leadership of the company, after making a huge mistake on forking into the retail space reversed course and slashed their efforts.
As far as management, which is always key, they had lost their way and made the stock a “sell” to me. Acknowledging the bad investment and taking a huge loss, akin to ripping the band-aid off, became a good leadership decision and a good trading decision in my opinion. That’s what Goldman is known for: its trading prowess.
Bad trades happen, and the retail trade surely was one of their biggest losers in the past decade.
With the decks now mostly clear of the retail overhang, Goldman can get back to doing what it does best: trade, investment banking, advisory and wealth management.
And that’s how CEO David Solomon painted the future on the company’s earnings call.
It also helped that they raised their dividend payout by 10%, so the stock now yields about 3%, and are expected to add to their $30 billion share buyback program thanks to lower capital reserve requirements.
Looking at the numbers, looking for accelerator factors, “heat factors,” the unique edge Goldman has when it sticks to its knitting, and how ultimately strong it is in terms of its balance sheet and capitalization structure, shows me the stock’s at least back on track.
If I owned Goldman, I wouldn’t sell it. I’d hold it, because I think it can recover another 15% and maybe rise 25% from here in a year or two.
But I wouldn’t buy the stock here because they don’t have a handle on expenses yet, haven’t seen a turn in dealmaking, could have more losses attributable to property investments and more write-offs cleaning up the rest of their retail trainwreck.
And as far as leadership, the mistakes David Solomon made were his, and even though he’s correcting them, he isn’t the guy to take Goldman into the future.
I’ll buy the stock when there’s new leadership at the firm.
Goldman may turn around at some point, but I’ll be looking to put my capital into something that has way more promise than the small, steady returns you get from household names. I recommend you do, too.
— Shah Gilani
Source: Total Wealth