This Day On The Street
Continue to site
ADVERTISEMENT
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

Dow Picked Goldman Sachs, but Investors Should Pass

When we take that estimate of $15.44 per share and extrapolate it out over the next five years, we come up with potential earnings per share of $18.75, five years from now.

Now we need to apply an appropriate multiple to those earnings to project a five-year target price. This is the hardest part of the equation. There is no set rules to go by here. Instead, we must weigh the following factors in determining the multiple:

  1. The current forward average PE ratio of the 3,565 stock that I track is currently 19.8.
  2. The current forward PE of GS is 10.25.
  3. The current average forward PE for the group is about 13.
I am using a very conservative multiple of 13 on the potential future earnings of the shares. When I do this I come up with a five year target price of $252 per share. The stock is currently only trading at $158.

With the shares currently trading around $158 per share, this stock has the potential to go up about 65% over the next five years. However, I require at least 80% upside potential or more to meet my strict valuation criteria. GS currently does not meet that requirement. It gets a value grade of C-.

There is obviously a lot that can go wrong or go right between now and then. And as we can see from the recent spike in GS' performance, stocks trade on expectations. And right now the expectations of other analysts are obviously positive because the stock was added to the Dow and Goldman has made a pretty good recovery coming out of 2009.

Those expectations will change with each quarterly report and any material news, good or bad, that comes out of the company.

The stock price will then adjust accordingly.

Stock Chart

So far, GS' performance and valuation does not look good, but let's complete that last step in analyzing GS' worthiness as a Dow member. Check out that stock chart:

Despite GS' rather dismal performance and valuation, I see a stock that is in a pretty good uptrend. I currently own a lot of stocks that have much better charts, however.

GS is currently a laggard sector of the market (financial).

GS currently does NOT meet my performance criteria.

GS currently does NOT meet my valuation criteria.

GS currently DOES barely meet my stock chart criteria.

Of the 3,656 stocks that I track, GS currently comes in only at #2,321 with a Gunderson stock grade of B-. I only consider stocks that have a combined grade of A- or better.

And while the Dow may have selected Goldman Sachs for its 30 stock portfolio, individual investor should pass.

Data from Best Stocks Now App

I am very vigilant on a daily basis on the stocks that I own. At the current time, clients of Gunderson Capital Management are not long the stock.

Please follow me on Twitter @billgunderson to check new opinions of the stock.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

3 of 3

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

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
Stocks Under $10

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

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

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
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

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

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG
AA $12.68 0.00%
BAC $16.69 0.12%
GS $208.48 0.00%
HP $73.09 0.00%
AAPL $131.49 -0.22%

Markets

DOW 18,126.12 -36.87 -0.20%
S&P 500 2,120.79 -2.69 -0.13%
NASDAQ 5,097.9760 -8.6170 -0.17%

Partners Compare Online Brokers

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs