This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Goldman Sachs May Grow by Shrinking: Street Whispers

NEW YORK (TheStreet) -- Goldman Sachs (GS) wants to get its stock back to pre-financial implosion levels. But rather than planning to boost shares in ways that earned the bank its "Vampire Squid" moniker, Goldman may be looking to pull a market slight of hand by buying back stock and reducing its public float to match a post-bust earnings outlook.

The investment bank has been apologizing lately to shareholders about its single digit return on equity (ROE), a measure that tells how fast the bank can grow its accumulated earnings.

"While we're trying to pare down and perform as well as we can in this difficult environment, these aren't returns that are acceptable to us or to our shareholders, and we know that," David Viniar, Goldman's chief financial officer, said of the bank's ROE in a July earnings call.

Goldman's ROE sits at 8.8% midway through 2012 compared to ROE's of over 30% in pre-crisis boom years. Getting that figure higher is seen as a key to lifting Goldman shares from $115 to its pre financial crisis highs above $220.

Pushing the stock to those levels using ROE; however, is near impossible considering both the bank's transformed business model in the wake of the bust and Federal Reserve mandated standards on capital. Crucially, both realities will keep a lid on leverage - a key element of financial sector ROE's prior to the crisis.

But Goldman's announced program to buy back up to roughly 11% of its outstanding shares in coming years may be the best hint for how the bank is gearing to return to pre-crisis earnings and valuations. By reducing its share count, Goldman may be smoothing a new path towards earnings records and a share price boost, this time focusing on earnings per share over ROE.

Consider that ROE represents the rate of gains on a bank's reinvestment of shareholder equity and is colored by leverage ratios as much as it is by earnings. For instance, Goldman's record 2009 earnings of $13.4 billion yielded a ROE of just 21.8%, according to Bloomberg data, compared with 30% plus levels in 2006 and 2007.

The reason? Goldman boosted its tangible common equity by over 70% to move past the crisis.

When investment banks were in the business of making directional bets on asset prices - called proprietary trading - and bundling up mortgages in the securitization market, balance sheet driven metrics like ROE made more sense. Now that Goldman's balance sheet is comprised of 93% liquid investments that fuel its market making and underwriting operations, according to a July Fixed Income Investor Presentation, earnings per share flows may be more appropriate.

By way of EPS, Goldman Sachs already has the brightest prospects of any U.S. investment bank, and its share buyback objectives give investors a new and predictable reason for optimism.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,493.37 -69.93 -0.42%
S&P 500 1,925.15 -5.52 -0.29%
NASDAQ 4,352.6390 -17.1340 -0.39%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs