John Dorfman, chairman of Thunderstorm Capital in Boston and a columnist for Bloomberg News thinks that Goldman Sachs (GS) stocks should be bought and he explains why:
"If it loses, Goldman might have to pay a substantial fine. But many firms, from Microsoft Corp. to the big tobacco companies, have taken legal blows and come back to perform well.
Consider Goldman’s record. Its revenue has climbed steadily: $4.5 billion in 1995, $16.6 billion in 2000, $25.2 billion in 2005 and $45.2 billion last year.
Profits have also moved up smartly: $1.3 billion in 1995, $3.1 billion in 2000, $5.6 billion in 2005 and $13.4 billion in 2009.
What earnings multiple would you expect to pay for this sort of growth? I think that in normal times many investors would be willing to pay 30 times earnings for it, or more. Yet today, nervous investors value Goldman shares at only six times earnings and 1.5 times revenue. This seems like a bargain to me.
At about $159, Goldman shares have declined more than a third from their 2007 high of about $247. Investors who don’t own the stock can thank the recession and bear market of 2007 to 2009, plus the SEC’s fraud complaint, for this buying opportunity."
Even though he is bullish on the stock he still shares some worries:
"To be sure, there are things to worry about. My biggest concern is Goldman’s debt, which is 823 percent of stockholders equity - way beyond my normal limit of 100 percent. High debt is commonplace for financial stocks, especially brokerage firms. That doesn’t mean it isn’t dangerous.
A second worry, of course, is the SEC’s lawsuit. Finally, some of Goldman’s profit centers - high-frequency trading, proprietary trading and collateralized debt obligations - are likely to be curbed by proposed financial reform legislation."
Related stock: Goldman Sachs Group, Inc. (Public, NYSE:GS)
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