Why Goldman Sachs might be the best banking stock to buy now
We have now seen the second quarter results of the largest banks in the United States, and it is difficult to say that Goldman Sachs (GS 1.07%) is not a winner of the results season compared to its peers. Not only has it easily exceeded expectations in terms of highs and lows, but the stock is trading at an attractive valuation, and the financial institution is developing in a way that long-term investors should pay close attention to. .
While it can certainly face short-term headwinds in a recession, Goldman Sachs looks like a compelling buying opportunity for investors who measure their returns over multi-year time frames. Here’s a look at how it’s doing and why it looks like a particularly attractive investment right now.
Second quarter results show bank’s resilience
To be sure, there were negative features in Goldman’s second quarter numbers. More importantly, profits fell 48% year over year, mainly due to a global slowdown in investment banking. M&A activity, as well as equity and debt underwriting, has dried up due to the uncertain economic climate, and the numbers show just how bad things are. Goldman’s investment banking fee revenue fell 41% from the prior year period.
However, it is important to realize that Goldman Sachs is designed to make money regardless of macroeconomic conditions. While investment banking and wealth management generally fare poorly in turbulent markets, its massive trading operations tend to benefit from higher volatility. In fact, fixed income trading revenue was up 55% year over year. In total, trading revenue was about $6.5 billion, up 32% from a year ago and more than half of the bank’s total revenue.
Rising trading revenue helped Goldman Sachs exceed expectations in both revenue and earnings, showing how resilient it can be in tough markets.
Consumer banking remains an unrecognized engine of growth
One of the most overlooked parts of Goldman Sachs, and one of the most compelling reasons to own the stock, is its consumer banking business.
The company is known as an investment banking giant, but it has been quietly developing its consumer banking operations for several years now. It started with the savings and loan platform Marcus, and has since added credit card lending and a robo-advisory platform.
In the second quarter, its retail banking revenue grew 67% year-over-year, fueled by strong credit card balance growth; it’s the bank behind the Apple (NASDAQ:AAPL) and General Motors (NYSE:GM) credit cards – as well as higher deposit balances, which provide the bank with a low-cost source of funding.
This might just be the start. Goldman Sachs management specifically mentioned things like offering checking accounts and more types of loans as possible future growth drivers. Given that retail banking provides just over 5% of the institution’s revenue today, there is room for years of rapid growth as it evolves into a more comprehensive bank.
The price is right
Goldman Sachs stock is trading around 24% below its all-time high, which isn’t as bad as some of its peers did during the recent recession. But at just 7.2 times trailing 12-month earnings and just above book value, the bank looks like an attractive value. And even though its earnings are expected to contract due to the current climate, Goldman is still trading at less than 9.5 times forward earnings. The dividend yields an attractive 3.1% at the current share price, and the company has been buying back its shares aggressively. In short, Goldman Sachs looks like an extremely cheap bank stock given its resilience and growth potential.
Matthew Frankel, CFP® has positions at General Motors and Goldman Sachs. The Motley Fool holds positions and recommends Apple and Goldman Sachs. The Motley Fool recommends the following options: long calls $120 in March 2023 on Apple and short calls $130 in March 2023 on Apple. The Motley Fool has a disclosure policy.