Goldman Sachs - One Of The Best Financial Stocks In 2009

Although the financials sector plum­meted over 57% during 2008, there are many opportunities to invest in good companies with solid bal­ance sheets at discounted prices.  I believe that Goldman Sachs (GS) will be one of the stocks to hit it big in 2009.

Goldman Sachs (GS)

Goldman Sachs continued its “best of breed” stance on many of the league tables during the year. Unlike many of their competitors, Goldman’s manage­ment has survived and has been pro­active with the volatility of the equity markets and taming investor’s concerns.

In September, Goldman converted from an investment bank to a bank hold­ing company which allows them to tap the Fed for funds. In October, Goldman also benefited from $10 billion of debt guarantees from the U.S. government.  Goldman is now in a unique position to solidify their position in many divisions as the market leader. Although Gold­man reported their first quarterly loss as a publicly traded company last quarter, they were still able to churn out a $2.3 billion profit for the year, while many of their competitors reported steep losses. The write-downs from the last quarter were driven primarily by asset declines in a variety of markets, but their core franchises (corporate advisory/investment banking, sales & trad­ing, and high net worth wealth management) did surprisingly well.

Goldman’s tax rate dropped to 1% on the $2.3 billion profit for the year. According to a company statement, the tax rate decline comes from more tax credits as a percent­age of earnings and because of “changes in geographic earnings mix.” During the year, Goldman and many other banks shift­ed income to countries with lower taxes.

Looking forward, Goldman will be able to take advantage of current market dis­locations and also return to profitability quicker than their competitors. Although their asset management division did rel­atively well during the 4th quarter, Gold­man is likely to shrink their hedge fund. Goldman’s management has done a terrific job in reducing the firm’s non-performing assets and leverage ratio. Their leverage ratio is now at 14x from 24x. They have also reduced their assets 18% last quarter to $885 billion. This rapid reduction in risk has strengthened Goldman’s bal­ance sheet and calmed short-sellers.

For 2009, expect Goldman’s FICC business to explode this year as the volatility and asset devaluations ease. In 2007, the division earned record net rev­enues of $16.1 billion in 2007. Last year, the rough market environment brought their net revenues down to $3.7 billion.

Over the next year, expect the division to perform strongly with net revenues be­tween $8-9 billion. The principal invest­ments group, which caused about $3.6 billion of the firm’s losses, should yield a positive return as Goldman reduces their risk in poor-performing assets. With the backing of the U.S. government and the help from the Fed, Goldman has access to cheap capital which will propel their business when the market finally turns.

Disclosure: The mutual fund the author is associated with is long GS.

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