JP Morgan reaffirms “buy” rating for Goldman Sachs

Last week, the banking stocks came under heavy selling in the US financial markets. There were two main reasons for the sudden change in the sentiment towards the banking and finance stocks. Firstly, the bond yields declined after the US Fed took a less than anticipated hawkish stance during the mid-March monetary policy meeting.

The 10-year Treasury yields dropped to 2.43%, from 2.6% on March 13th . This indirectly affects the ability of the banks to charge more money on the amount given as loan. Secondly, the market is increasingly becoming sceptical about the feasibility of Trump’s tax reforms.

The negative sentiment took a toll on the banking stocks, which were the main gainers in the rally that began after Trump won the US Presidential race. However, the erosion in the market capitalization has also provided an opportunity to invest at a fair price in financially healthy stocks such as Goldman Sachs Group (NYSE: GS).

Goldman Sachs

The stock, which has lost nearly 10% in the past three weeks to close at $228.75 on Friday, now appears to be a good buy on the basis of the following reasons. One of the main concerns of Goldman Sachs’ investors is the long-term incentives offered to its employees. The issue was raised in last year’s annual meeting. To ward off investors’ concerns, the Board has decided to link 80% of CEO’s salary to the performance of Goldman Sachs. The stock awards were also linked to the return (absolute and relative) on equity. Following the decision, the salary of Lloyd Blankfein, CEO of Goldman Sachs, was reduced 27% to $22 million for 2016.

For the current quarter, the average earnings estimate of analysts is $5.19 per share, up 93.66% from $2.68 per share reported in the corresponding period last year. This indicates that analysts are bullish about the company’s performance in the current quarter. The operating margin of Goldman Sachs has increased 7.7% to 33.7% in fiscal 2016. Likewise, the return on assets has increased 17 basis points y-o-y to 0.82% in the fiscal 2016. The forward PE ratio of the investment banking giant is only 12.3, while it is 19.5 for the S&P 500. This indicates a strong capital position.

Considering the latest developments, in a research report published last week, JP Morgan Chase & Co. reiterated their “buy rating” on shares of Goldman Sachs.

Similarly, an investment research firm Vetr upgraded the stock of Goldman Sachs to “hold” rating, from the prior “sell” rating.

The stock of Goldman Sachs now trades below the one month low of 230.69. The zero reading of the stochastic oscillator indicates an extremely oversold scenario. A wide gap between the last traded price and the 50-day moving average also supports a technical reversal. Thus, we can infer that the downtrend is limited.

So, a binary trader can use the probable bounce back in the price to enter into a short-term trade. The best strategy would be to purchase a high or above contract which expires in a week. While investing the surplus amount, a trader should make sure that the entry is made when the stock trades near $230.

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