3.A healthy stock chart-I don’t like sideways trends (Apple would be a good example of this), I despise downtrends (Inverse ETF’s would be a good example of this), and I get very nervous with extended uptrends, unless the valuation is still compelling. And of course the most dangerous trend of all is a topping out trend that is beginning to roll over.
Let’s start with performance of the stock. Again, I look at short, intermediate, and long-term performance.
Over the last ten years GS has delivered 8% per year to investors while the market has delivered 5%.
Over the last five years they’ve delivered 6% per year while the market has delivered 8% during the same time frame.
Over the last three years GS has delivered 4% per year to investors while the market has delivered 14%.
Over the last 12 months, GS is up 41% while the market is up only 17%.
When I rank the performance of Goldman Sachs against the other 3,500 or so that I follow, it only earns a performance grade of C.
That sound pretty average to me. How can you expect above average returns with average stocks?
In my opinion, GS is NOT worthy of your investment based on performance.
Now, onto valuation.
Although I do like to see momentum, I’m not solely a momentum investor. Nor am I a pure value investor. I like to combine momentum with value.
The consensus analyst’s estimates for GS’s earnings next year currently stand at $15.44 per share. The consensus average five-year earnings growth estimate for GS is 5.3% per year.
Given these expectations, the shares currently sport a PEG ratio of 1.95. PEG ratio is just one valuation measure, however.
When we take that estimate of $15.44 per share and extrapolate it out over the next five years, we come up with potential earnings per share of $18.75 five years from now.
Now we need to apply an appropriate multiple to those earnings to project a five-year target price. This is the hardest part of the equation. There is no set rules to go by here. Instead we must weigh the following factors in determining the multiple:
I am using a very conservative multiple of 13on the potential future earnings of the shares. When I do this I come up with a five year target price of $252 per share. The stock is currently only trading at $158.
With the shares currently trading around $158 per share, this stock has the potential to go up a about 65% over the next five years. However, I require at least 80% upside potential or more to meet my strict valuation criteria. GS currently does not meetthat requirement. It gets a value grade of C-.
There is obviously a lot that can go wrong or go right between now and then. And as we can see from the recent spike in GS’ performance, stocks trade on expectations. And right now the expectations of other analysts are obviously positive because the stock was added to the Dow and Goldman has made a pretty good recovery coming out of 2009.
Those expectations will change with each quarterly report and any material news, good or bad, that comes out of the company.
The stock price will then adjust accordingly.
So far, GS’ performance and valuation does not look good, but let’s complete that last step in analyzing GS’ worthiness as a Dow member. Check out that stock chart:
Despite GS’ rather dismal performance and valuation, I see a stock that is in a pretty good uptrend. I currently own a lot of stock that are have much, much better charts however.
GS is currently a laggard sector of the market (financial).
GS currently does NOT meet my performance criteria.
GS currently does NOT meet my valuation criteria.
GS currently DOES barely meet my stock chart criteria.
Of the 3,656 stocks that I track, GS currently comes in only at #2,321 with a Gunderson stock grade of B-. I only consider stocks that have a combined grade of A- or better.
And while the Dow may have selected Goldman Sachs for its 30 stock portfolio, individual investor should pass.
I am very vigilant on a daily basis on the stocks that I own. At the current time, clients of Gunderson Capital Management are not long the stock.
Please follow me on Twitter @billgunderson for a change in opinion of the stock. Also, download our App: Best Stocks Now!