Still Undervalued After Much Growth: Goldman Sachs Group, Inc. (GS), Annaly Capital Management, Inc. (NLY)

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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.

Goldman Sachs (GS)

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.

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