(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)
The Goldman Sachs Group, Inc. (GS) is off to a terrible start in 2018 with shares of the investment bank already down over 8% on the year, and nearly 15% off their highs from mid-March. However, the outlook doesn't appear to be getting better any time soon. The technical charts are suggesting shares could fall another 9% from their price of $233.39 on June 8, handing the stock a potential loss of about 22% from peak to trough. (For related reading, see: The Evolution of Goldman Sachs.)
Earnings in 2018 look healthy, but the problems lie in 2019 and 2020 with profits and revenue growth forecast to slow significantly. Additionally, when valuing the company on a price to tangible book value, shares of Goldman are still trading at some of their highest levels in the past five years.
The bears have taken control of the stock, with shares falling below a critical technical support price at roughly $234, suggesting shares decline to about $213, a drop of approximately 9%. The stock has been trending lower since the middle of March, and the downtrend and the support level come together to form a technical pattern known as a descending triangle—a bearish pattern—yet another indication of lower prices to come.
The bulls are not rushing back into shares either, as shares continue to lose momentum. The relative strength index (RSI) has also been steadily falling since peaking at 70 at the start of the year, indicating shares are overbought. Until the RSI can show it has bottomed by starting to rise or diverge from the falling stock, it suggests the stock will continue to fall as well.
Part of the reason for the stock's struggle maybe its decelerating earnings and revenue growth. Earnings are expected to climb by nearly 16% in 2018 to $22.89 per share, while revenue is seen jumping 9.6% to $35.14 billion in 2018. However, growth is forecast to slow materially in 2019, with revenue expected to rise by only 2%, and 2.7% in 2020. The outlook for earnings isn't any better, climbing about 6% in 2019, and about 8% in 2020.
Despite the sharp declines already in 2018, shares of the company are still trading at some of their highest price-to-tangible book multiples in the past six years, at 1.3. As the chart below shows, the stock has been trading at some of its highest levels starting in 2017. (For more, see also: Is Goldman Sachs Still A Winner?)
The outlook for the investment bank over the next several weeks does not look strong. With the next round of quarterly results not coming until the middle of July, shares may continue to lag absent a change in sentiment.
Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Upon request, the advisor will provide a list of all recommendations made during the past twelve months. Past performance is not indicative of future performance.