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

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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