Goldman Sachs Group, Inc. (NYSE:GS) has always been one of my favorite companies to follow, but it has been difficult to invest in over the past few years. Unlike most financials, Goldman rebounded rapidly after the financial crisis, only to dive again in late 2011. Shares are up considerably this year, but are still a long way below their pre-crisis $250 share price. Despite the roller-coaster ride, I still believe that Goldman Sachs Group, Inc. (NYSE:GS) represents the “smartest guys on Wall Street” as they have been referred to, and after pulling back by more than 10% from the 52-week high reached in early June, maybe it is time to take another look. Is this a pullback to take advantage of, or is one of Goldman’s peers a better value?
Who is Goldman Sachs?
One of the largest and most respected investment banking companies in the world, Goldman Sachs Group, Inc. (NYSE:GS) has almost $1 trillion in assets. The company operates in four segments, the largest of which is the Institutional Client Services segment, which makes up 53% of Goldman’s revenues. This segment is made up of Goldman’s market-making activities as well as its securities services business.
Other segments include Investment Banking (15% of revenues) which includes financial advisory services as well as the company’s underwriting operations. Investment Management (also 15%) offers investment strategies and advice, as well as a range of services to mutual funds, pension funds, and high-net worth individuals. Investing and Lending (17%) is the most exciting, in my opinion, and includes Goldman Sachs Group, Inc. (NYSE:GS)’s revenue (or losses) from its proprietary trading and lending activities.
The smartest guys on the street?
Goldman Sachs has a controversial reputation, especially since the financial crisis, but one thing that is universally agreed upon is that Goldman attracts and retains some of the best talent on Wall Street, and they are willing to pay for it. Goldman Sachs Group, Inc. (NYSE:GS) pays out about 40% of its total revenues in compensation, as they believe that talent recruitment and retention are what will give them a leg up.
During the crisis, Goldman initially profited about $4 billion by betting on a collapse of the subprime mortgage market, but things soured for the firm as the crisis went on. In September 2008, just after Goldman Sachs Group, Inc. (NYSE:GS) agreed to become a bank holding company, Warren Buffet made a $5 billion investment in Goldman, calling it “a bet on brains.” However, the U.S. Treasury also kicked in $10 billion as part of TARP, and Goldman stirred up major controversy by giving out over $1 billion in employee bonuses in that same year.
Despite the rise in share price over the past year, Goldman Sachs Group, Inc. (NYSE:GS) still trades at a relatively cheap valuation, as do most financials at the present time. Goldman is expected to earn $14.51 per share in 2013, meaning that shares currently trade for just 10.4 times this year’s earnings. The consensus calls for Goldman to increase its earnings to $15.35 and $16.00 over the next two years, as the continuing improvement in the economy should greatly help Goldman’s client-service based businesses.