The S&P 500 index has had a fantastic year, with the benchmark index up nearly 23% so far in 2024 and reaching new all-time highs. But many individual stocks have performed even better, including the well-known investment bank Goldman Sachs (GS -8.13%). The stock price has jumped more than 37% this year.
Founded in 1869, Goldman has long been viewed as a best-in-breed investment bank in an incredibly competitive industry. Is the stock still worth buying after its already strong performance this year? Let's investigate.
An improving environment and core business
You've probably heard of investment banking before, but similar to the term marketing, there are many different businesses within investment banking. Investment banks serve as advisors for mergers and acquisitions (M&A) and also help issue equity (IPOs) and debt for companies. They also help investors buy and sell fixed-income instruments and equities. These businesses are cyclical and their earnings can be hard to predict. Investment banks can make a lot of money but rarely get the same high multiples as tech and growth names.
M&A and IPO activity tends to be more active in stable environments and when interest rates are declining. Higher-rate environments and more volatile markets can slow down activity. Trading tends to benefit from volatility, which leads investors to reposition portfolios and therefore do more buying and selling.
NYSE: GS
Key Data Points
Goldman and other investment banks did extremely well during the pandemic, but conditions have been difficult in recent years because fed funds rate hikes initiated by the Federal Reserve effectively froze M&A and IPO activity. With interest rates now on the decline and poised to fall further, the economic environment has become more favorable for Goldman. M&A activity started to rebound and advisory fees at the company jumped 27% in the company's most recent quarter from the linked quarter. The IPO market has remained sluggish but should return eventually. Goldman has also seen higher equities trading revenue.
The other part of Goldman's business is asset and wealth management. The unit has more than $3 trillion in assets under supervision and makes up close to 30% of revenue. Investors want to see Goldman grow this business further because when it provides a more stable stream of revenue, the market tends to assign it higher valuations. Goldman has also been making the business more capital-light by reducing its equity and debt investments, which makes the business easier to grow, more stable, and more fee-based.
Is it a buy?
Goldman stock currently trades at 17 times earnings, toward the high end of where it has traded over the last five years. This tells me that some of the expected rebound in investment banking next year has likely been baked into the stock price, although Goldman tends to beat earnings estimates when the environment becomes more favorable and investment banking and trading activity picks up.
That said, Goldman has also improved its core business in asset and wealth management and plans to dispose of its consumer assets. This will provide the company with more capital and also make the business model less capital-intensive. It could also help management achieve its long-standing goal of having lower regulatory capital requirements.
Goldman has created a moat in the investment banking business that will probably never be displaced due to the company's brand and long-standing relationships. Add in the improving environment and core business, and long-term-minded investors can still buy Goldman.
