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  • Martin Sosnoff

Goldman Sachs Vs. JP Morgan: It’s Goldie By 18 Lengths

5-Year Chart on Goldman Sachs

JPMorgan Chase is just another polite banker, near fully valued these days. But, Goldman Sachs is streaking down the middle of the track, energized by its outsized investment banking business.

Analysts, of course, missed Goldman’s “Make hay while the sun shines” numbers. Investment banking revenues rose 87% in the September quarter, an unheard-of number. Such numbers sustainable through yearend, put earnings power at the rate of $60 a share with a return on equity of 25%. Goldman is selling at 7 times earnings on my projections.

The stock ticking at $412, should show yearend book value approximating $300. So, at least on paper Goldman doesn’t look expensive compared with other bank stocks. Notable is operating expenses rose just 6% with headcount rising a mere 5%. Leverage in earnings rests in the quality of your operators in trading and investment banking.

Nobody dares project the surge in trading and investment banking is sustainable. For certain, the Goldman 5-year chart shows a lot of backing and filling. If bullish you’d ascribe to an earnings rate of $60 a share on a stock that just broke through over $400. Goldie’s price-earnings ratio is at 7 times what may or may not prove out as peak earnings.

It sells at 1.3 times book value. Year-over-year, net revenues in wealth management, $2 billion, pace 35% higher than a year ago. This is powder-puff earnings that only a bear market can eat into. Even mediocre performance in money management doesn’t provoke much account migration.

I bought Goldman Sachs a year ago. It’s a double, selling around book value then. You’re supposed to buy financials near book, then bang ‘em out at 2 times book unless a banking property is moribund from too much debt and loan losses on its balance sheet, like Lehman Brothers, Bear Stearns and Merrill Lynch. Book value is a safe entry point. Even Bank of America needed a major transfusion from Berkshire Hathaway to stay alive in the financial meltdown of 2008 – ‘09.

After recovery, financials approach a 20% sector weighting in the S&P 500 Index, not much less than technology. Money managers can’t avoid an underweighted position forever or risk big underperformance. Looking at aggressive portfolios reporting on top 10 holdings in 13F quarterly filings, these honchos need to catch-up.

At midyear, I couldn’t find anyone near full sector weighting in financials. Berkshire Hathaway, a proxy for financial house commitments, hardly ever gets any play from money managers. Why mark up your competition? Past 18 months, Goldman Sachs doubled, then gapped over 15 points on its September quarterly report. JPMorgan and Citigroup, both rising near 2% on less brilliant numbers.

JPMorgan and Citigroup are curious, historically speaking. Citigroup nearly self-destructed in the 2008 – ‘09 financial meltdown. Under Jamie Dimon’s steady hand, Morgan came through the crisis with just scratches. The market hasn’t forgotten Morgan’s sail-through. I’ve a tough time with this property that looks fully priced, possibly overvalued on current book value and price-earnings ratio.

Latest quarter, Morgan earned $3.03 per share. So multiply by 4 and call Morgan’s earnings annualized at $12 a share. Currently, Morgan ticks at 13 times earnings, its $4 dividend yield just 2.5%. Consider, tangible book value approximates $70 a share so we are talking about a bank stock selling over 2 times book value, a heady level, far above industry average. Year-over-year Morgan’s book value rose just 9%.

Be-all and end-all for bank stocks is their lending prowess. There’s at least a 20% earnings fillip when loan-to-deposit ratios widen. This ain’t happening as yet. Long overdue and over-anticipated, minus a snappy positive loan to deposit ratio bank stocks do stagnate. Goldman is primarily a deal house, not a big consumer lender or mortgage player like Wells Fargo, Citigroup and JPMorgan. Net, net, we’ve got Goldie at 7 times cyclically strong earnings while Morgan sits at 13 times earnings that look full today.

Early sixties, annually, I’d subway down to Wall Street for my quick lunch with Gus Levy, then irrepressible headman at Goldman Sachs. Gus would sit out on the trading floor all day to make sure none of his traders got carried away, pressing his open-to-buy.

I got my 15 minutes while Gus lunched on a sandwich and a glass of milk. His secretary had trimmed off the toasted bread crust.

I’d press Gus for more access to Goldman traders, analysts and deal men even though I was just an operator of a small hedge fund. Gus saw me because my previous job was running family money at Starwood for the Rosenwalds who had controlled Sears, Roebuck. Most of their stock market money stayed in Sears but I got them to pare their holdings and buy growth stocks like Xerox and Polaroid.

On my way out, Gus shouted “I’m going to pull your card at the UJA dinner next week. Be ready with a nice number, more than last year.”

I miss old Wall Street that was more like a village. I’d scream at Goldie’s traders handling my blocks, taking me for quarters instead of eighths.

If Warren Buffett can hang onto American Express for over 50 years, I can hold Goldman for a full cycle.

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