NEW YORK (TheStreet) -- Recently the Dow Jones Industrial Average (DJIA) removed three stocks from its membership roster and added three new stocks in their place. The stocks that were kicked out: Alcoa (AA), Bank of America (BAC) and Hewlett-Packard (HP). The stocks added: Visa (V), Nike (NKE) and Goldman Sachs (GS).I wrote about this change in another publication and why, in my opinion, it took so long for Visa to be added. I also analyzed the worthiness of Visa as a Dow member. Ultimately, what I determined is that Visa is a great stock that is worthy of the Dow, and its membership has been a long time in the making. But what about Goldman Sachs? Why was it finally chosen as a DJIA member and is it actually worthy?
Before I get started on my analysis of GS, let me share my method of madness on how I rank stocks. I separate them from one another by taking into account the following criteria:
- Performance: Short term, intermediate term and long term where possible. I compare the performance of the stock with its peers and against the other 3,565 stocks that I monitor. Valuation: While I like performance, I have seen way too many momentum darlings come crashing back down to earth due to astronomical valuations. We have learned huge valuation lessons from incidents like the crash of the Nasdaq in 2000-2001, the crash of the housing market in 2006, and many other such bubbles. Valuation does matter! A healthy stock chart: I don't like sideways trends (Apple would be a good example of this), I despise downtrends (Inverse ETF's would be a good example of this) and I get very nervous with extended uptrends, unless the valuation is still compelling. And of course, the most dangerous trend of all is a topping-out trend that is beginning to roll over.
PerformanceData from Best Stocks Now App Let's start with performance of the stock. Again, I look at short-, intermediate- and long-term performance. Over the last 10 years, GS has delivered 8% per year to investors while the market has delivered 5%. Over the last five years, they've delivered 6% per year, while the market has delivered 8% during the same time frame. Over the last three years, GS has delivered 4% per year to investors while the market has delivered 14%. Over the last 12 months, GS is up 41%, while the market is up only 17%. When I rank the performance of Goldman Sachs against the other 3,500 or so that I follow, it only earns a performance grade of C. That sound pretty average to me. How can you expect above-average returns with average stocks? In my opinion, GS is NOT worthy of your investment based on performance. Now, onto valuation.
ValuationAlthough I do like to see momentum, I'm not solely a momentum investor. Nor am I a pure value investor. I like to combine momentum with value.
- 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.