Goldman Sachs (GS)

This has suffered along with all the global investment banks. They don’t have any serious regulatory issues, but are all suffering from low interest rates as well as regulatory oversight issues, having to pull capital out of trading businesses. The great news is that while everybody else is reducing exposure to trading businesses, this bank is not. There is going to be, and already is, a lot less competition in those trading businesses that they run so well and so shrewdly. Trading at about 10X earnings, a slight discount to tangible BV. Dividend yield of 1.6%.

(A Top Pick July 9/15. Down 21.01%.) He was early on US financials and it is still a relatively small weight for him. At this time, he would prefer to focus on the commercial banks and some of the asset managers. He got Stopped out of this.

(A Top Pick July 9/15. Down 27.52%.) This company is being regulated into the ground, probably for good reasons, but it has changed their business model making it harder for them to generate outsized profits. He got stopped out.

(A Top Pick March 24/15. Down 18.22%.) This is a wonderful bank. The stock has been unduly hit. Over the last 4 months everybody was saying the IPO market was done and there are no more initial public offerings and the company can’t make any money. Quietly, without people noticing, the bond market has been running at a record pace for the last 2 months, and this company is making money on that. Trading at 8X BV and the free cash flow is strong. Dividend yield of 1.69%.

(A Top Pick Dec 22/15. Down 18.41%.) He was hoping that financials moved the market. When there were all those triple digit days back in December, that is usually a point where it is going to go up or come down. In this case the market came down. Financials led the way down. This is no longer a trade. It is probably something you could own here as it is it at very attractive level. No rush to get into this.

He looks at the markets in the US, and as the banks go, so do they. They have been stuck in a range for a long time. It is stuck between a couple of moving averages, but getting closer to the lower end. Expects to see it above $200 early in the new year.

There no clarity in how they treat derivatives on the balance sheet. The worry is always who is on the other side of the derivative transaction. All the investment banks are in the process of trying to clean up their accounting of these. He prefers MS-N.

The premier investment bank in the world, trading below book value and is an incredibly well run company. Retail banks have a very cheap source of funding. GS-N does not have that.

(Top Pick Sep 30/14, Down 3.87%) They are learning or re-learning how to be a company in the current environment with a sustainable ROE, which they moved to above 10%. They are getting traction. They are still at 1 times book and should be 1.2-1.3 with the current structure.

Financials are a natural winner. If you think investment banking is going to continue to expand then this is a natural beneficiary. It had a natural pullback and you should buy it here.

The premier capital markets business globally. Mergers and acquisitions right now are coming at a very rapid pace and they are big beneficiary of that. Increased volatility is good for trading revenues. The legal environment is starting to get a little bit better. Dividend yield of 1.27%.

(A Top Pick May 9/14. Up 29.25%.) This is a huge power in underwriting and investment banking in the US. Have always had a terrific record of proprietary trading, also make some money in commercial lending. The climate for offerings in the US really good, so they are making a lot of money on that side. The volatility in the bond market is good for traders. They raised their dividend.

It is probably the best investment bank in the world, and they passed their stress test so they could increase their dividend. He also expects share buy backs. Buying back shares when at book value is a very good use of capital.

If looking to invest in this bank, you really have to ask yourself “what is the exposure that I want to achieve?”. Some US banks have exposure to the retail consumer, and this one would not fit. Very heavily dependent on merger and acquisition and wealth management. He prefers to play the consumer in the US. You could do this through Bank of America (BAC-N) or Wells Fargo (WFC-N). He prefers to play this through regional banks such as National PA Bancshares (NPBC-Q), as not all regions in the US are recovering at the same pace. (See Top Picks.)

(A Top Pick Jan 2/14. Up 6.07%.) Trading right around Book, so it is slowly coming back. Have moved their ROE from mid-single digits into low double digits, so he thinks they have opportunity for expansion of their multiple. It also has its opportunity for organic growth.