Oversold Goldman Sachs Signals Reversal on Q1 EPS Growth

Oversold Goldman Sachs Signals Reversal on Q1 EPS Growth
April 25, 2017

 
The stock of investment banking giant Goldman Sachs Group (NYSE: GS) plunged last week to $213.2, from a high of $248.68, following the report of fiscal 2017 first-quarter results that missed Wall Street estimates. The market was mainly disappointed by a decline in the trading revenue. Notably, Goldman Sachs’ competitors such as Bank of America, Citi Group, and JP Morgan reported an average of 21% increase in the trading revenue. In fact, trading revenue enabled other banks to surpass Wall Street estimates quite easily. Still, we expect a short-term recovery in the stock of Goldman Sachs due to reasons mentioned below.

For the fiscal 2017 first-quarter, Goldman Sachs posted earnings of $2.162 billion, or $5.15 per share, on revenues of $8.026 billion. This compares with earnings of $1.2 billion, or $2.68 per share, on revenues of $6.34 billion in the prior year’s similar quarter. On an average, analysts surveyed by Thomson Reuters anticipated Goldman Sachs to report earnings of $5.31 per share on revenues of $8.446 billion. It should be noted that Goldman Sachs has not missed Wall Street’s expectations since the fourth-quarter of 2015.

The Equities Trading revenue declined 6% y-o-y to $1.674 billion. The revenue from Total Institutional Client services, which includes equities trading revenues, fell 2% to $3.359 billion. That contributed to the fall in the share price. Goldman Sachs clarified that the decline in trading revenue was mainly due to low volume and volatility. However, all other segments have performed well.

Revenues from the Investment Banking division were $1.703 billion, up 16% from $1.463 billion reported last year. Likewise, Investment Management revenues increased 12% y-o-y to $1.500 billion. Investing and lending revenue recorded a four year high of $1.464 billion. At the end of first-quarter, the company’s Basel III Advanced CET1 ratio stood at 12.9%. At the end of first quarter, Goldman Sachs leads the mergers and acquisition business. The firm also leads underwriting corporate stock offerings.

During the quarter, Goldman Sachs spent $1.5 billion to repurchase 6.2 million shares at an average price of $243.22. Under the existing share repurchase program, on April 17, 2017, the company’s Board has authorised repurchase of an additional 50 million shares. The Goldman Sachs’ Board has also increased the quarterly dividend to $0.75 per share from $0.65 per share. The dividend is payable to shareholders on record on June 1, 2017. Thus, considering the CET1 ratio and increase in revenues and earnings in the first-quarter, we anticipate the stock to bounce back in the days to come.

The price chart indicates that the stock has bounced off a minor support at 213. The probability of an uptrend is also increased by the stochastic oscillator having a reading of almost zero. On the upside, the next major resistance exists only at 242. Thus, technically, a short-term uptrend in the stock of Goldman Sachs can be anticipated.

Goldman Sachs - Technical Analysis -

A call option expiring on or around May 2nd can be bought from a binary broker. Care should be taken to time the entry when the stock trades near $219 in the equity market.

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Andrew Wright

Prior to founding tradersasset.com in 2014, Andrew worked as a proprietary trader, then as a market maker. As a market maker, he traded options in over 100 stocks, he then began trading currency pairs in 2013. Andrew still actively trades both, and prides himself on educating and informing traders on the benefits of both Binary Options and Forex.


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