Goldman Sachs: Dow Winner

NEW YORK ( TheStreet) -- Goldman Sachs ( GS) was the winner among stocks of large U.S. banks on Tuesday, with shares rising 3.5% to close at $165.13.

Goldman's shares were propelled in part by the announcement by S&P Dow Jones Indices that the investment bank's stock would replace Bank of America ( BAC) among the 30 components of the Dow Jones Industrial Average , starting on Sept. 23.

Despite being booted from the Dow, shares of Bank of America rose 1% to close at $14.61, on a day of strength for the entire financial sector.

S&P Dow Jones Indices also said Visa ( V) would replace Hewlett-Packard ( HPQ), while Nike would replace Alcoa ( AA), among the Dow 30.

"The index changes were prompted by the low stock price of the three companies slated for removal and the Index Committee's desire to diversify the sector and industry group representation of the Index," S&P said in its announcement.

The broad indices on Tuesday all ended with solid gains, with several positive developments for investors. President Obama agreed to consider a proposal backed by Russia for the government of Syria to give up its chemical weapons. Syria also indicated willingness to cooperate. While it remains to be seen if the proposal will go anywhere, it buys plenty of time for the president and members of Congress to agree on a plan to avoid military action.

Following Monday's report of a 7.2% year-over-year increase in Chinese exports during August and Japan's upward revision of its second-quarter GDP growth rate to 3.8% from 2.6%, there was more good news out of Asia on Tuesday. China's industrial production for August was up 10.4% accelerating from the previous month's growth rate of 9.7%. China saw a 7.2% increase in exports during August from a year earlier, according to an announcement on Sunday by China's General Administration of Customs.

Retail sales in China were up 13.4% from a year earlier, accelerating from the July growth rate of 13.2%.

Japan's Cabinet Office on Monday revised its estimate of second-quarter gross domestic product growth for the world's third-largest economy to an annual rate of 3.8% from its preliminary estimate of 2.6%. Optimism in Japan was no doubt boosted over the weekend when Tokyo won its bid for the 2020 Summer Olympics.

The KBW Bank Index ( I:BKX) rose over 1% to close at 64.16, with all but two of the 24 index components rising for the session.

Shares of Citigroup ( C) were up 2% to close at $51.09. Citigroup's shares have returned 29% this year. The strong economic news out of Asia is especially important for the company, which reported that 20% of its second-quarter revenue and 22% of its earnings came from its businesses in Asia.

Goldman Sachs

Goldman's shares have returned 31% this year, following a 43% return during 2012. The shares trade for 1.2 times their reported June 30 tangible book value of $141.62, and for 10.6 times the consensus 2014 earnings estimate of $15.54 a share, among analysts polled by Thomson Reuters. The consensus 2015 EPS estimate is $16.05.

Another major near-term event for Goldman is the stake Warren Buffet-led Berkshire Hathaway's ( BRK.B) will take in the investment bank's common shares in October.

When Berkshire made a $5 billion preferred investment in Goldman in 2008, Berkshire was granted 43.5 million warrants to purchase Goldman common shares with a strike price of $115. Rather than exercise the option, Berkshire agreed earlier this year to accept common shares in Goldman equal to the profit on the warrants, based on Goldman's average share price during the 10 trading days prior to Oct. 1. Berkshire will end up holding roughly 3% of Goldman's common shares, valued at about $2.2 billion.

Goldman reported that during the first half of 2013 it repurchased 20.6 million shares for $3.12 billion. But investors may be concerned over a possible curtailment of the investment bank's return of capital to investors over coming years. Citigroup analyst Keith Horowitz estimates that if federal regulators accept the Basel Committee's proposed changes in large banks' supplementary Tier 1 leverage calculations, Goldman's June 30 supplementary Basel III Tier 1 leverage ratio would drop to 3.9% a reported 4.8%.

Under rules proposed in July by federal regulators, the largest U.S. banks -- including Goldman -- will be required to raise their supplementary Basel III Tier 1 leverage ratios to at least 5.0% to be considered well-capitalized.

GS Chart GS data by YCharts

Interested in more on Goldman Sachs? See TheStreet Ratings' report card for this stock.


-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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