The old saw is to buy Goldman Sachs when it trades below its book value—and investors once again have that opportunity.
Shares of Goldman Sachs Group (ticker: GS) declined 5.5% during Friday’s selloff, ending at $287.56 each. Goldman now trades below its first-quarter book value of $293 a share, marking the first time since 2020 that the investment banking leader is fetching less than book, or shareholder equity per share.
Book value equates to the liquidating value of a company and often offers a floor underneath a stock. Goldman remains highly profitable and should be worth more than the liquidating value of its assets, which are mostly liquid securities.
Buying Goldman below book during 2020 in the $200 a share range was a winning strategy, as the stock more than doubled to over $400 in late 2021 on the back of record 2021 earnings of about $60 a share. The company—and the banking industry at large—are in better shape than they were in 2020.
Goldman’s dip comes amid a sharp drop in banking stocks: Wells Fargo (WFC) also dropped below book value Friday, while Citigroup (C) languishes at a deep discount to book. The SPDR KBW Bank exchange-traded fund (KBE) fell 3.5% Friday to $45.56.
Wells Fargo , whose shares dropped 6.1% Friday to $40.08 each, now trades below its first-quarter book value of $42 a share. Citi
group, whose stock fell 4.5% to $47.71, trades for about half its book value of $92 a share— and appreciably below its tangible book value of $79 a share. Berkshire Hathaway (BRK/A, BRK/B) took a $3 billion stake in Citi, whose stock yields over 4%, during the first quarter.
The other members of the Big Six of U.S. banking— JPMorgan Chase (JPM), Morgan Stanley (MS) and Bank of America (BAC)—trade above book value. Bank of America , whose shares fell 3.9% on Friday to $33.17, now trades at just a 10% premium to book value.
Wells Fargo banking analyst Mike Mayo has an Outperform rating on Bank of America, which is one of his top picks. “What’s surprising is that we estimate BAC would still have ROTCE (return on tangible equity) of 10%+ in a recession, implying that not only does the stock price in a recession today but that it trades at a 15%-20% discount to historical levels,” Mayo wrote on June 1, when the bank’s stock was at $37. At the time, Mayo saw 40% upside.
Barron’s has written favorably on both J.P. Morgan and Goldman this year, arguing both stocks looked inexpensive given solid profit outlooks. The six leading banks now trade for just seven to 10 times projected 2022 earnings, with Goldman and Citigroup at the bottom of the group with price/earnings ratios of seven.
Investors worry about recession risks, and stock buybacks should be more muted this year. But one powerful positive that seems to be getting ignored by investors is that higher short rates this year should provide a nice boost to banking profits.
Write to Andrew Bary at firstname.lastname@example.org
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