The Dirty Secret Behind Goldman Sachs' Conviction Buy List

When Goldman Sachs (NYSE: GS) kicked Apple Inc. (Nasdaq: AAPL) off its celebrated Conviction Buy List, casual observers might have seen the move as yet another blow to a battered stock.

But don't be surprised if Apple stock rallies in the months ahead.

That's because when you look at the record, most stocks that get dropped from Goldman's Conviction Buy List – a frequently updated list of equities the bank says will outperform the market – don't falter.

In fact, over the past six months, most of the stocks that Goldman has booted off the Conviction Buy List have gone up, and several have actually outperformed the market.

That might seem strange but for Goldman's checkered past.

Reasons to Doubt Goldman Sachs' Conviction Buy List

It was exactly one year ago that a former executive director at Goldman, Greg Smith, wrote a scathing op-ed piece in The New York Times that described in lurid terms how the bank exploited its own customers, derisively referred to as "Muppets," to enhance profits.

And Goldman is also known for (though not alone among the big investment banks) advising clients to make one move while taking the opposite side of the trade.

"The truth is that Goldman Sachs and the rest of the big banks on Wall Street invariably "blow up' customers to make money for themselves," explained Money Morning Capital Wave Strategist Shah Gilani.

With such a dubious track record, it should come as no surprise that many stocks that fall out of favor with Goldman – by getting dropped from the Conviction Buy List – suddenly start to fare much better.

Over the past six months, the Standard & Poor's 500 index is up about 7.5%. Here are a few stocks Goldman demoted last fall and how they've performed since:

• Travelers Cos. Inc. (NYSE: TRV): Removed Oct. 2; the stock is up 21.33% since.

• CNO Financial Group Inc. (NYSE: CNO): Removed Oct. 3; the stock is up 14.9% since.

• Westlake Chemical Corp. (NYSE: WLK): Removed Nov. 13; the stock is up 10.41% since.

Since Jan. 1, the S&P 500 is up about 9%. Here are a few stocks Goldman knocked off its Conviction Buy List in January:

• Campbell Soup Co.: (NYSE: CPB): Removed Jan 11; the stock is up 28.49% since.

• Packaging manufacturer Rock-Tenn Co. (NYSE: RKT): Removed Jan. 15; the stock is up 16.24% since.

• Cloud computing software company NetSuite Inc. (NYSE: N): Removed Jan 18; the stock is up 16.93% since.

Goldman Sachs Conviction Buy List a Lagging Indicator

Another suspicious pattern in the timing of when Goldman takes a stock off its Conviction Buy List has to do with how late the bank seems to make its call.

Just take Apple, for instance. Apple stock plunged more than $250 over a period of several months, but Goldman stubbornly kept it on the Conviction Buy List.

Only this week, long after the damage had been done, did Goldman finally get around to dropping it.

Or look at what happened with The Boeing Co. (NYSE: BA). Goldman dropped Boeing on Jan. 16, following several weeks of a worsening issue with batteries in its new 787 Dreamliner catching fire. 

Not surprisingly, Boeing stock is up 10.14% since. So Goldman was late on the bad news that dropped the stock, and deprived any investors foolish enough to follow its advice of the rally that followed.

And there's the crazy story of Chipotle Mexican Grill Inc. (NYSE: CMG). After a bad earnings report last year, Goldman kicked Chipotle off the Conviction Buy List – but only after the stock dropped 18% to $316.98, a one-day loss of about $87.

Not to worry, though. Goldman reinstated Chipotle on Jan. 4, after the stock had recovered to $341.27.

The truth is, that fishy smell coming from Goldman Sachs' Conviction Buy List is just one reason to be wary of big banks.

"Not only do big banks like Goldman run roughshod over their customers (trading partners) and clients (banking relationships), the big banks manipulate markets, industries, economies and countries to fatten their already gigantic bonus pools and personal fortunes," Gilani said.

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