Goldman Sachs (GS) and Morgan Stanley (MS) report earnings beats. Sell GS, buy MS.
Goldman Sachs (GS – yield 1.2%) reported adjusted (non-GAAP) third quarter earnings per share (EPS) of $5.02 this morning. Various published consensus EPS estimates were $4.50, $4.25 and $4.17.
GS was experiencing aggressive EPS growth when I added the stock to the portfolio in June 2016 at a price of 156. Since that time, earnings growth has slowed to the currently-expected 9.3% in 2018—although analysts will certainly increase their earnings estimates after today’s strong third-quarter report. An increase in earnings estimates is not going to meaningfully boost Goldman’s 2018 earnings growth rate. I’m therefore taking this opportunity to sell GS from the Buy Low Opportunities Portfolio.
Longer-term investors who prefer to hold quality companies, despite slower earnings growth, should be confident in both Goldman Sachs and the economic outlook for banks. Investors who prefer to focus on capital gains via undervalued growth stocks should sell GS. Sell.
Investment banker Morgan Stanley (MS – yield 2.0%) reported diluted third quarter earnings per share of $0.93 this morning vs. the consensus estimate of $0.81.
Investors will notice that news stories on bank earnings reports tend to continually harp on low bond trading revenue. It is absolutely true that big investment banks are earning less bond trading revenue than normal, mostly due to a lull in bond market volatility. The bigger point should be that bond trading is just one of several revenue sources for investment banks, their overall profits are very attractive, they’re trading with relatively low P/Es and decent dividend yields, and they stand to greatly benefit from improving economic activity, changes in tax legislation and rising interest rates. In short, the articles that focus on lower bond trading revenue seem to be written by whining alarmists whose modus operandi is to always find something negative to scare investors about. I’m not buying it!
I’m adding MS to the Growth & Income Portfolio today. Prior to today’s earnings report, analysts expected the company’s EPS to grow 18.8% and 14.7% in 2017 and 2018. The corresponding P/Es are 14.3 and 12.5. The stock offers better EPS growth, better dividend yield, and is more undervalued than GS. In addition, the price chart is more bullish, with no upside resistance in sight. Investors who own GS and want to keep that capital invested in bank stocks should consider MS or Bank of America (BAC, Strong Buy – yield 1.8%).
Last important detail: Many of you know that I worked for Morgan Stanley for 14 years. I am recommending the stock based on numbers, price chart and economics. If I were recommending the stock due to some weird personal bias, I imagine that I would have recommended MS in the summer of 2016, when I instead told people repeatedly that Goldman Sachs (GS) was the obvious choice in bank stocks. Strong Buy.