When earnings come out, investors and traders often make buy, sell, or hold decisions based on the stock's reaction to headline earnings metrics.
But a deeper look into earnings numbers is always warranted.
And right now, a perfect objective lesson on why you should look past the surface is happening with Goldman Sachs Group Inc (GS). Shares saw a pretty large pop after an earnings report that looked abysmal.
So, let me walk you through what happened…
First of all, before earnings "drop," it's instructive to follow consensus estimates for what they might be. Especially if the company's management is guiding analysts' estimates.
In the case of Goldman, management was practically announcing they were expecting bad numbers. So, analysts started lowering their earnings estimates weeks before they dropped.
How's that instructive?
Interestingly, it's not so much what you'd think. If management is warning about bad numbers, the stock will likely get hit. It's a telegraph to analysts – not investors – to lower their estimates… maybe by a lot.
Why? To make consensus estimates easier to beat. That's why.
And that's exactly what happened to Goldman. Analysts hammered down their estimates and Goldman – with even worse than consensus estimates results – saw their stock rise, not fall, about 7% on the week.
Wall Street’s Oldest Game
That game is an old one, and firms like Goldman know exactly how to play it. Of course, the narrative they spun was about cleaning up their mistakes of the recent past (and boy, were they ever big mistakes!) and looking to the future.
The rounded-down view of Goldman's numbers told the story of how lame their "experiment" (which is what they're calling it now) in retail banking was.
Under CEO David Solomon Goldman, it plunged head-first into the retail space a few years ago. Goldman was looking to open retail checking accounts, savings accounts, and offer loans, as well as banking and lending platforms commensurate with what other retail-oriented firms were doing.
It introduced Marcus, a retail access point, into the storied Goldman name. And in 2021, it bought an installment lending platform called Greensky for $2.2 billion.
Well, in the second quarter Goldman sold most of its Marcus portfolio and unloaded Greensky. It took a $1.1 billion impairment charge on the ill-fated businesses, including a write-down of more than $750 million on Greensky.
Investment banking fees were down 20%. Net-interest income was down 2%. And earnings per share for the quarter came in at $3.09, down a whopping 60.4% from the year-ago quarter.
Expenses were 16% higher in the quarter, and operating expenses rose 12%.
To cap it off, it took a $403-million loss on equity investments attributable to property.
Pretty bad, all around. In fact, the only bright spot was equity-trading revenue was up 20%.
So, why did the stock pop higher?
A Better Option Than Goldman
One reason is the leadership of the company – after making a huge mistake on forking into the retail space – reversed course and slashed their efforts.
As far as management, which is always key, they had lost their way and made the stock a "sell" to me. Acknowledging the bad investment and taking a huge loss, akin to ripping the band-aid off, became a good leadership decision and a good trading decision, in my opinion. That's what Goldman is known for: its trading prowess.
Bad trades happen… And for Goldman, the retail trade surely was one of their biggest losers in the past decade.
With the decks now mostly clear of the retail overhang, Goldman can get back to doing what it does best: trade, investment banking, advisory, and wealth management.
And that's how Solomon painted the future on the company's earnings call.
It also helped that they raised their dividend payout by 10%. The stock now yields about 3%. And the company is expected to add to its $30-billion share buyback program thanks to lower capital reserve requirements.
Looking at the numbers, looking for accelerator factors, "heat factors," the unique edge Goldman has when it sticks to its knitting, and how ultimately strong it is in terms of its balance sheet and capitalization structure, shows me the stock's at least back on track.
If I owned Goldman, I wouldn't sell it. I'd hold it. Because I think it can recover another 15% and maybe rise 25% from here in a year or two.
But I wouldn't buy the stock here because they don't have a handle on expenses yet. They haven't seen a turn in dealmaking, could have more losses attributable to property investments, and more write-offs cleaning up the rest of their retail trainwreck.
And as far as leadership, the mistakes Solomon made were his, and even though he's correcting them, he isn't the guy to take Goldman into the future.
I'll buy the stock when there's new leadership at the firm.
Goldman may turn around at some point…
But I'll be looking to put my capital into something that has way more promise than the small, steady returns you get from household names. I recommend you do, too.
And right now, the real potential for moonshot wins is in the small, innovative players that 99% of investors haven't heard of yet. These are agile companies quietly working to dominate particular areas of multibillion-dollar markets.
This coming Tuesday, I'm doing a free private briefing where I'm pulling back the curtain on three of these stocks in the hottest tech field right now: artificial intelligence (AI).
These are little-known AI companies trading mostly under $5. But I'm predicting these stocks could potentially provide massive profits for early investors: up to 2,100% in gains within a few short years!
That's why you don't want to miss this event.
Cheers,
Shah Gilani
About the Author
Shah Gilani boasts a financial pedigree unlike any other. He ran his first hedge fund in 1982 from his seat on the floor of the Chicago Board of Options Exchange. When options on the Standard & Poor's 100 began trading on March 11, 1983, Shah worked in "the pit" as a market maker.
The work he did laid the foundation for what would later become the VIX - to this day one of the most widely used indicators worldwide. After leaving Chicago to run the futures and options division of the British banking giant Lloyd's TSB, Shah moved up to Roosevelt & Cross Inc., an old-line New York boutique firm. There he originated and ran a packaged fixed-income trading desk, and established that company's "listed" and OTC trading desks.
Shah founded a second hedge fund in 1999, which he ran until 2003.
Shah's vast network of contacts includes the biggest players on Wall Street and in international finance. These contacts give him the real story - when others only get what the investment banks want them to see.
Today, as editor of Hyperdrive Portfolio, Shah presents his legion of subscribers with massive profit opportunities that result from paradigm shifts in the way we work, play, and live.
Shah is a frequent guest on CNBC, Forbes, and MarketWatch, and you can catch him every week on Fox Business's Varney & Co.