Goldman Sachs, Inc. (GS) reports fourth quarter 2020 results next week, with analysts expecting earnings of $7.36 per share on revenue of $10.1 billion. If met, earnings per share (EPS) will mark a 57% increase in earnings from the same quarter in 2019. The stock entered a two-week decline in October despite higher and lower estimates in the third quarter, but Goldman shares rallied in November and increased by almost 40% until the end of the year. Expectations are high following this impressive performance, especially with the booming financial sector accumulation fashion.
Key points to remember
- Goldman Sachs releases fourth quarter 2020 pre-market results on Tuesday, January 19.
- The stock is technically overbought and is trading at an all-time high.
- The company benefits from higher yields and the enlargement yield curve.
- News selling reaction after earnings could portend larger scale correction.
The financial powerhouse lost its superstar status after the economic collapse of 2008, with Dodd Frank reforms curbing proprietary trading activity. Weak business investment and the transition to share buybacks as the primary method of stock appreciation also hurt Goldman’s bottom line. The 2020 stimulus and high odds of a 2021 package under the Biden administration set bond yields on fire, promising higher earnings in the financial sector in the coming quarters.
Goldman enters the robo-advisor space in 2021 despite intense competition, is currently testing an automated investing service called Marcus Invest. An annual management fee, starting at 0.15% of assets, will allow retail clients access to a subset of features offered to the broker’s wealthiest customer base, with smart beta ETFs and asset allocation models for an investment as low as $1,000. As with competitors, accounts will be monitored “daily” and rebalanced “periodically”.
Wall Street’s consensus on Goldman Sachs is mixed, with a “Moderate Buy” rating based on eight “Buy” and two “Hold” recommendations. An analyst is unimpressed with the growing tailwinds, telling shareholders to close their positions and steer clear. Price targets currently range from a low of $225 to a high of $407, while the stock is expected to open Friday’s session above the midpoint target of $313. Targets and ratings are expected to rise if the company exceeds expectations again next week.
A share buyback, also known as a stock buyback, occurs when a company buys back its stock in the market with its accumulated cash. A stock buyback is a way for a company to reinvest in itself. The redeemed shares are absorbed by the company and the number of outstanding shares on the market is reduced. Because there are fewer stocks in the market, each investor’s relative stake increases.
Goldman monthly chart (2007-2021)
A multi-year uptrend peaked at $250.70 in 2007, giving way to a pullback that accelerated to an all-time low of $47.41 during the 2008 economic crash. It rebounded to $188 in third quarter of 2009, marking resistance that was not mounted until a 2015 breakout that failed a few months later. A stronger bid after the 2016 election lifted the stock 23 points above the 2007 high in March 2018, before another failure at the end of the year.
The stock fell to a seven-year low during the 2020 pandemic decline and rose in June, stabilizing just above $200. It broke that barrier in November and took off like a rocket, posting an all-time high on January 6. balance volume (OBV) The Accumulation-Distribution indicator is showing healthy buying interest, but is well below highs seen over a decade ago. However, the divergence is not helpful as the company repurchased thousands of shares over the same period.
The last monthly candlestick is trading 100% off the top Bollinger Band®, triggering an automatic sell signal that predicts an extended pullback or consolidation. Additionally, the monthly stochastic oscillator reached an extremely overbought level that has triggered three bearish crossovers since 2009. Taken together, investors should tighten risk parameters if there is a news selling reaction after earnings, as this could turn into an interim correction fully fledged.
A Bollinger Band® is a technical analysis tool defined by a set of trend lines drawn two standard deviations (positively and negatively) far from a simple moving average (SMA) of the price of a security, but which can be adjusted to the preferences of the user. Bollinger Bands® were developed and copyrighted by renowned technical trader John Bollinger, designed to uncover opportunities that give investors a greater likelihood of correctly identifying when an asset is oversold or overbought.
Goldman Sachs shares are overbought and trading at an all-time high ahead of the Jan. 19 earnings release.
Disclosure: The author held no position in the aforementioned titles at the time of publication.