A Bet On The Smartest Bankers In The Business: Goldman Sachs Group, Inc. (GS), JPMorgan Chase & Co. (JPM)

For a while there, I started to think that Goldman Sachs Group, Inc. (NYSE:GS) was getting ahead of itself, but now I’m not so sure. Goldman Sachs is, in my opinion, one of the most exciting financial companies to invest in, and now I believe it’s trading at a discount. I think it’s once again time to examine the company that Warren Buffett himself called “a bet on brains.”

Goldman Sachs (GS)

Who is Goldman Sachs?

With almost $1 trillion in assets under management, Goldman Sachs is one of the world’s leading investment banks, providing a range of services to corporations, governments and high-net-worth individuals. Goldman’s revenue rose by 19% in 2012, which was a major catalyst for the 50% move to the upside in the past year or so.

Goldman Sachs Group, Inc. (NYSE:GS) breaks its business into four segments. The investment banking segment (15% of 2012 revenue) provides financial advisory and underwriting services to corporations, governments, other banks and individuals. Investment Management (15%) provides prime brokerage, financing services and securities lending services. Investing and Lending (17%), which experienced the best growth in 2012, is made up of Goldman’s revenue from its proprietary lending and investing activities. Finally, the largest segment, Institutional Client Services (53%), includes all of the company’s revenue from market making and execution operations.

Why invest in Goldman?

I’ve been a big fan of Goldman Sachs Group, Inc. (NYSE:GS) for a long time. However, I wanted to wait for a little bit of a pullback before taking a serious look. Well, recently we got one, from the high of $159 to the current level of around $148, a 7% correction. Even though this represents a 63% gain from the 52-week low of $90.43, I believe the stock is still very attractively valued and has nowhere to go but up over the next few years.

At just 11 times earnings, Goldman is projected to earn $13.64 per share this year, and the consensus calls for this to increase to $14.96 and $16.23 in 2014 and 2015, respectively. This translates into average annual forward growth of 9.1%, which is a fantastic growth rate for such a low valuation. Additionally, if you think the economic recovery will continue for several more years (as I do), this growth rate could prove to be very conservative indeed.

Competitors

Goldman Sachs Group, Inc. (NYSE:GS) competes with all of the major financial companies with investment services, so to put Goldman’s value to the test, I’d like to briefly compare it to JPMorgan Chase & Co. (NYSE:JPM), which is my overall favorite financial sector company, and Morgan Stanley (NYSE:MS), another power player.

Morgan Stanley is one of the largest financial firms in the U.S., with investment banking, securities and wealth management services. Of the two companies I just mentioned, it’s the closest to Goldman in terms of the makeup of its business. 2012 was not as kind to Morgan Stanley (NYSE:MS) as it was to Goldman, and actually was the exact opposite, as Morgan’s revenue declined by 19% due to weak client activity. As a result, the company reported a loss of $0.04 per share last year (a major red flag for any prospective long-term investment). Revenue is supposed to rebound nicely in the coming years. However, I think Goldman’s performance over the past several years is more indicative of a healthy company.