Goldman's Stock Seen Falling 33% Off High

(Note: The author of this fundamental analysis is a financial writer and portfolio manager.)

Shares of Goldman Sachs Group Inc. (GS) have fallen 25% from their March highs, a precipitous decline for a stalwart of the banking industry. That amounts to tens of billions of dollars in lost market value for investors in one of Wall Street's venerable banks. Now, things may get worse as the bad news mounts for Goldman. Technical analysis suggests that the stock may drop 12% further from its current price, which would push GS down 33% off its all-time high.

Making matters worse, analysts have slashed their fourth quarter earnings and revenue estimates over the past month. Also weighing heavily on the stock is news that the Malaysian finance minister is demanding that Goldman repay fees paid to the bank for the setup of an investment fund. 

GS data by YCharts

Weak Chart

The chart shows the stock is approaching a technical support level at $200. Should the stock drop below that level of support it is likely to fall to the next support region at $183.50. The relative strength index (RSI) has been steadily trending lower since August after peaking near overbought levels. Additionally, the RSI has been in a long-term downtrend since late 2016. The RSI failed to make a new high in early 2018 despite the stock reaching an all-time high in March. It is a bearish divergence and suggests momentum is leaving the stock. 

Slashing Growth Estimates

Analysts have reduced their fourth quarter earnings estimates by 3% and their revenue estimates by 2% over the past month. 

Growth estimates for 2019 have fallen dramatically since July. Analysts are now looking for earnings growth of less than 1% down from 5%. Meanwhile, revenue estimates have also dropped to less than 1% from 2% previously. These growths are down significantly from 2018 and will be slow to return in 2020. 

GS EPS Estimates for Next Fiscal Year data by YCharts

The stock's valuation has fallen sharply with a price to tangible book value of 1.1, which is near the middle of its historical range. Since 2014, the ratio has traded in a range of 0.8 to 1.5. 

Slowing earnings growth in 2019 is not only a problem at Goldman Sachs, but many of the other big banks are also facing similar slowdowns. With a valuation that is still in the middle of its historical range and a weak technical chart, unless the company can show investors 2019 will be better than feared, the stock is likely to continue to fall. 

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.