Positive Update on Goldman Sachs

After a long slump, the banking sector was beginning to show signs of a turnaround; investors became more optimistic about the economy. Following news of the UK 'Brexit', this trend has reversed. Shares in Goldman Sachs (NYSE:GS), which is highly exposed to the UK economy, fell 7% to $141.86. GS is now down an estimated 34% in just one year.

(Nasdaq.com)

Across Wall Street, stock underwriting, commodity trading, and revenue from fixed income are weak. However, industry experts are predicting improved conditions for financial firms, and GS is well positioned to benefit from this change.

We see a current buying opportunity.

Goldman Sachs May Be Ready for a Comeback

Although London remains a key trading city, 'Brexit' may weaken the city's position as the financial hub of Europe. Experts indicate that leaving the EU will take at least two years -- a process that will not fully start until Britain has a new prime minister. As a result, GS has plenty of time to make staff adjustments. In addition, the company has a long history of adapting to change, according to its CEO.

A solid balance sheet, combined with the ability to quickly slash costs through compensation cuts and layoffs, should help GS in the current downturn. According to an analyst at JPMorgan, it's anticipated that GS will buy back 19% of outstanding shares from 2016 through 2018, thus reducing the count by 16%.

Peer Pressure? Not for Goldman

Compared to its struggling peers, GS appears particularly strong. Its recent price of $141.86 per share is higher than others in the industry:

- Barclays Bank (NYSE:BCS): $8.89 per share
- Bank of America (NYSE:BAC): $13.00 per share
- Morgan Stanley (NYSE:MS): $24.52 per share
- JPMorgan Chase (NYSE:JPM): $59.60 per share

GS reports revenue in four divisions: investment management (18% of last year's revenue, encompassing wealth management and fees earned by managing investment funds); institutional client services (45% of revenue, including research, lending, creating customized hedges and securities, and market-making); investment banking (21% of revenue, including advising clients on restructurings and mergers and raising money by issuing debt or shares); and investing and lending (16% of revenue, derived from Goldman's long-term investments in other companies).

What Does the Future Hold?

GS has taken steps to diversify into other areas (stable income, lending, and asset management) in an attempt to offset volatile trading; industry experts are taking notice. Morgan Stanley recently named GS their top pick among large U.S. banks and recommended overweighting financials. They predicted that the company's shares could reach as much as $207, a 45% gain in one year, based on cost-cutting, healthier junk-bond markets, and overall steadier income sources.

Conclusion: Buying Opportunity

GS is well positioned to benefit from the improving conditions in the banking sector and is currently trading at a significant discount, based on a number of indicators. Management's decision to cut costs and buy back shares at current levels will likely lead to increased returns for shareholders. We recommend buying GS shares while they are this relatively low price.