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:
The current forward average PE ratio of the 3,565 stock that I track is currently 19.8.
The current forward PE of GS is 10.25.
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.
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.
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This article was written by an independent contributor, separate from TheStreet's regular news coverage.