Jim Cramer: I think Goldman Sachs is an amazing buy
Someone is pulling on the bank’s stock. It’s too painful to watch them. This morning Goldman Sachs (GS) reported a pretty amazing quarter. Remember, despite the pandemic, Goldman had the second highest quarterly revenue. It has record quarterly income in investment banking and the best fixed income, currencies and commodities in nine years, the best net equity income in 11 years. That’s crazy.
I know it’s all about the money with me, not friends, but I felt really proud to be an alumnus after this term because the market criticized this company more than any other financier. Even though he is the recognized leader, the hardest one to find a job on the streets, he sells for the lowest price for the income model. Not anymore, I thought, it wasn’t just a surprise on the upside, it was a called hit, which is why the stock was up eight points before the market opened. But as the morning wore on the stock started to drain, no support at all.
When I worked at Goldman Sachs, my boss always described the company in a way that I thought was initially humiliating. “Jimmy, we’re a dry cleaner, and don’t forget that,” I was told. This is because a dry cleaner does not own anything. It takes, it cleans, it pays and it returns. No inventory. So no losses. The worst that happens? The business must sell the inventory and collect the money.
But today on page three of the package, the bridge so to speak, what did I see? A nasty line, a line that said “allowance for credit losses” and a number, $ 1,590 billion, that stunned me. It is not a dry cleaner. “The allowance for credit losses in 2020 was significantly higher year over year, primarily due to revisions to forecast deterioration expected in the broader economic environment.” Now I can deal with slower growth but loan losses, oh my god.
Now, in truth, I think the bank is incredibly conservative. I believe this is an amazing buy. I own it and have owned it for my charitable trust for ages. But what matters is that if you think we are heading into an abyss full of flaws, you can’t own that money when you can own one that won’t suffer losses, like Mastercard (MA) or Visa. (V) or PayPal (PYPL), or a fancy fintech company, that counts to own a finance company, or even a Square (SQ) that has some exposure to loan losses but is a fast growing fintech .
This madness is simply an extension of what happened yesterday when JP Morgan (JPM) brought in a fantastic number but took a big loan allowance. Ditto with Citi (C) and Wells (WFC). It didn’t matter how well they were doing.
Want insult to injury? Citi has this great company, Treasury and Trade Solutions, which helps clients maintain their operations, manage their supply chain and optimize working capital, and provide liquidity management services. This business, on its own, is so big and so lucrative that I think it would be worth the entire $ 100 billion business if it were split up. The bank is better dead than alive.
Now, given that Goldman Sachs might never fetch such a good quarter – yes, that was so special – given that it might not be able to be overtaken, I have no idea what will prompt people buy this other than a vaccine that helps them reverse losses, although I doubt that will happen.
They can increase the dividend although this is frowned upon by regulators, or they can buy back stocks. Except that regulators have said no to that too.
These days, the new dry cleaners are tech companies that make payment plumbing work the best and have zero inventory.
Do you know what’s ironic? Goldman has a partner in Apple (AAPL); they managed Apple’s credit application. It’s a big business, but the value? At the moment, that’s only up to Apple.
Banks like Oils, shouldn’t they be hit for wasting dirty assets? No, not fair. The fact that Goldman can make so much money in this environment is extraordinary. It’s too cheap. Right now, the value will beg. It won’t always be that way. But he’s not a lame horse. He’s a thoroughbred, but has no hope of crossing the finish line ahead of most of the Dow Jones or S&P 500 average.
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