Amid an ongoing global equities boom that has seen the major indices rise by 55 percent or more since their early 2009 lows, it somehow remains possible to spot old-fashioned value plays. While many investors remain fundamentally skeptical about the “easy money” central-bank policies that have played a major role in the stock-price run-up, it is difficult to see why some well-capitalized companies have missed out on much of the recent action.
Over the past few years, impartial analysts and market watchers have made the case for hundreds of undervalued companies. At the same time, plenty of stocks that outperformed their peers during the depths of the recession have now fallen out of favor. In particular, two names that weathered the global downturn admirably are getting short shrift these days: the storied REIT Annaly Capital Management, Inc. (NYSE:NLY) and iconic investment bank Goldman Sachs Group, Inc. (NYSE:GS). In light of their recent earnings growth and fundamental health, both of these names are significantly undervalued. In fact, both currently sport P/E ratios below 11. What’s more, both Annaly and Goldman are set to benefit from secular tailwinds in their respective industries.
About Goldman Sachs and Annaly Capital
New York-based Goldman Sachs is a well-known investment bank that specializes in wealth management, financial services, fund management, targeted acquisitions, underwriting, risk management and other standard investment-banking activities. At one point, the company ran one of the most successful “prop desks” in existence, and continues to earn tremendous amounts of money in various derivative-related activities. Goldman Sachs Group, Inc. (NYSE:GS) also operates a robust merger-and-acquisition department and provides corporate defense services to companies that are vulnerable to hostile takeovers. Goldman employs well over 30,000 people and earned $7.3 billion on $34.2 billion in gross 2012 revenues.
As one of the world’s largest REITs, Annaly Capital owns a diverse portfolio of commercial and residential real estate vehicles in North America. Most of the company’s investments take the form of federally backed mortgages, mortgage-backed securities, pass-through securities, debentures and other complex financial instruments. Since it distributes over 90 percent of its income to its shareholders, Annaly Capital Management, Inc. (NYSE:NLY) is a tax-free entity under applicable U.S. REIT laws. With just 150 employees, the company earned $1.7 billion on $2.1 billion in gross 2012 revenues.
Annaly’s Situation
Given that Annaly has offered an annual yield of between 10 and 20 percent over the past five years, it should not be overly surprising that the company’s stock price has stayed largely flat during the same period. However, Annaly’s fundamentals suggest that investors may have overlooked some of its most important attributes. Specifically, the company’s stock price has fallen by more than 20 percent over the past year despite a string of eye-popping growth numbers that culminated in a recent 54 percent jump in quarterly revenues. With a forward P/E of just 11, Annaly seems unable to deliver on the obvious promise of these numbers.
Goldman’s Situation
Goldman Sachs Group, Inc. (NYSE:GS) faces a similar situation. Despite marked economic improvement and a broader-market rise of more than 40 percent during the intervening years, the company’s stock trades at more than 20 percent below its October 2009 high of around $189 per share. What’s more, the company exhibited quarterly revenue growth of more than 50 percent during the last three months of 2012 and boasts a forward P/E of just 10.3. There is simply no good reason that the healthiest major bank to emerge from the global financial crisis should droop under the weight of such low expectations.
Long-Term Outlook, Competitors and Industry Trends
Although it can be difficult to suss out the underlying motives of the institutional investment firms that tend to trade heavily in high-volume stocks like Annaly Capital Management, Inc. (NYSE:NLY) and Goldman, some of the apparent aversion to these names may come down to the painful lessons of the global financial crisis. After all, the recent financial crisis occurred largely as a result of an unholy alliance between reckless financial institutions, irresponsible lenders and incompetent federal mortgage authorities. Although they held up rather well during the depths of the crisis, companies like Annaly and Goldman do deserve some of the blame for the mess.
At the same time, the industries in which they operate are once again approaching full strength. The merger activity that serves as a significant profit engine for Goldman Sachs Group, Inc. (NYSE:GS) is in full swing, and the U.S. real estate market is finally awakening from its depression. It defies logic that two healthy companies that have positioned themselves for these respective recoveries would still sport P/E ratios in the low double digits.
Since the REIT space is a bit more opaque than the banking industry, it can be difficult to compare Annaly directly with any of its peers. On the other hand, Goldman Sachs Group, Inc. (NYSE:GS) is performing worse in the post-crisis environment than just about every other major bank. Only Bank of America corp. (NYSE:BAC) has come close to duplicating Goldman’s dismal performance: it has fallen by more than 50 percent since its early 2010 high. Some big names, such as Mohnish Pabrai, have actually been investing in both Goldman and Bank of America. Then again, Bank of America made a clear bottom in late 2011 and has since doubled in value. Goldman has yet to clear such a hurdle.
In sum, both Annaly Capital Management, Inc. (NYSE:NLY) and Goldman Sachs Group, Inc. (NYSE:GS) have been beaten down despite clear secular tailwinds in their favor. In the absence of a major economic shock or the revelation of systematic accounting fraud, it seems unlikely that their depressed valuations can persist for much longer. Going forward, investors who take cautious long positions in these companies should be rewarded for their faith.
The article Still Undervalued After Much Growth originally appeared on Fool.com and is written by Mike Thiessen.
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