What in the World Is Goldman Sachs Thinking?

In the annals of investment banking, Goldman Sachs (NYSE: GS  ) deserves a chapter all its own. Seldom has a company been so reviled, admired, envied, and even feared.

Love it or hate it, there's no denying that Goldman Sachs is a force to be reckoned with. When Goldman predicted in the summer of 2006 that oil prices would surge to $100 and beyond, many Fools laughed. The laughing stopped when oil proceeded to do just that. And when Goldman followed up its $100 prediction with a call for $200 oil just two years later, not only did no one laugh -- they actually bid up oil futures, helping Goldman create its self-fulfilling prophecy. Almost.

As we know now, oil prices never did reach $200, and today they're sitting below even Goldman's $100 prediction. But that doesn't change the power of this banker's predictions to move markets.

Which way did he go, George, which way did he go?
But sometimes, it's devilishly difficult figuring out just what Goldman's predictions are -- and which way they'll push the markets. Once upon a time, Goldman was happy to publish its ratings on Briefing.com for everyone to see, just as most Wall Street analysts do. In recent years, however, Goldman has pulled back from this practice.

Perhaps Goldman wasn't comfortable having its record held up to public scrutiny. Or maybe this banker's just shy. Whatever the reason, it's no longer easy to figure out just what Goldman thinks on any given matter -- or to judge how well it thinks. I aim to change that.

He went thataway
Over the next few weeks, I'll be examining Goldman's ratings moves for you in this column, and seeing whether we can divine a purpose behind the ratings. And while Goldman's Briefing.com-boycott prevents us from automatically tracking its upgrades and downgrades via our newsfeed at CAPS, I will be setting up a CAPS "avatar" for the banker, inputting its recommendations by hand. Over time, this should allow us to get a better feel for whether Goldman is really as good as its reputation suggests. Without further ado, let's jump right in to this week's news.

So far this week, Goldman has shifted its stance on one commodity, and three companies. Let's start with the commodity news.

Forget plastics -- the future is cardboard
In shades of its 2006 oil price prediction, Goldman predicted on Wednesday that bulk prices for containerboard ("cardboard" to you and me) will rise $50 per ton in February/March of next year. This estimate is both $10 higher, and one full month earlier than Goldman had earlier predicted, suggesting that cardboard demand is rising faster and more strongly than previously thought.

In direct response to its new estimate, Goldman raised price targets on two companies that already occupy slots on its "Conviction Buy" list:

  • Temple-Inland, now expected to sell for $22 within the next six months.
  • International Paper (NYSE: IP  ) , now putatively priced at $30.

In apparently unrelated news, Goldman also upped the price target on another of its favorite stocks, Amazon.com (Nasdaq: AMZN  ) . According to the analyst, media coverage of "price wars" among Amazon and rivals like Barnes & Noble (NYSE: BKS  ) and Wal-Mart (NYSE: WMT  ) have piqued shoppers' interest. They're clicking their way over to Amazon.com to see just how low these prices will go -- and Amazon's doing its darndest to lighten their wallets before they leave the site.

According to Goldman, even if Amazon's price war costs it some points on gross margin, the higher sales volume it's enjoying could boost operating margins -- and profits.

Cardboard boxes, plastic purchases ... green profits?
What does cardboard manufacturing have to do with online retailing? Simple. Anytime you place an order with Amazon, it arrives at your doorstep contained in … a cardboard box.

And in recommending both cardboard and Amazon, I believe Goldman placed a double bet on American retailers having a very Merry Christmas this year.

If I'm right -- and if Goldman is right -- then savvy investors might want to draw a few conclusions from what the banker has already said, about what it might start saying in the weeks to come. For example: Goldman likes the people who make the boxes, and the people who pack products inside the boxes. Will it next praise the companies that ship the boxes, FedEx (NYSE: FDX  ) and UPS (NYSE: UPS  ) ?

Foolish takeaway
I'm not saying you should rush out and buy FedEx and UPS in hopes they will be upgraded -- nor even that you should buy International Paper or Amazon just because Goldman likes 'em. Like the man said: "Valuation Still Matters."

Personally, however, I believe that one of the two kings of cardboard-box-shipping sells for a pretty nice price. (Three guesses which one.)

As always, you're free to disagree. Click over to Motley Fool CAPS now and tell us your favorite way to play the Goldman upgrades.

Fool contributor Rich Smith  does not own shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 764 out of more than 140,000 members. The Fool has a disclosure policy.

Amazon.com and FedEx are Motley Fool Stock Advisor recommendations. Wal-Mart Stores is a Motley Fool Inside Value pick. United Parcel Service is a Motley Fool Income Investor selection.


Read/Post Comments (2) | Recommend This Article (17)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 29, 2009, at 7:57 AM, stevezee1 wrote:

    We are big exporters of cardboard to Asia, hence that bet by Goldman. It's been that way for years. One of the few export products where the US leads.

    2

    As far as I can see looking at some fairly recent GS client letters they are positive on some internet retailers and negative to neutral on most retailers as a group.

    My guess is that they are probably right. Lots of window shopping at retailers, but the buying comes by way of the internet retailers. Most retailers this holiday weekend did well selling mostly "lost leaders" at the mall. Most of which is sold at below cost to breakeven plus or minus 10%..

    As for Amazon, what doesn't its 50 times forward 2010 earnings already price in? You can like the company but not its valuation!

    I also think the electronic bookreaders now have to compete with the falling prices of the netbooks. At $200-$279 one is better off with the more versatile netbook.

  • Report this Comment On December 01, 2009, at 1:47 AM, TMFDitty wrote:

    Excellent comments, stevezee1. Especially the kick at the Kindle.

    Keep up the good work, popping bubbles and bursting assumptions.

    Fool on!

    TMFDitty

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