After a decade-long bull market and record GDP expansion, good value stocks have been hard to find lately. But now, they've come back into vogue as market volatility, the pandemic, and a recession have caused the stock prices of many good companies to fall below their true long-term value. This is essentially what constitutes a value stock -- a stock trading below its intrinsic value due to temporary factors. And coming out of a recession into a period of growth is a great time to buy them.
A lot of value investors have focused their attention on sectors that were beaten down during the recession, like the financial sector. With the GDP expected to grow 4.2% in 2021, some banks and financial firms should have some wind at their backs.
One of the best value stocks investors should be watching is Goldman Sachs (GS +0.31%).
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Investors missing the boat
You might be surprised that Goldman Sachs is still a value, considering how well it has performed throughout the pandemic and how it's positioned today. But trading at just 10 times forward earnings, it definitely is. The company is in a great position to boost earnings this year and beyond, and the price should reflect that sometime soon, which is why now is the time to consider buying.
Goldman Sachs was firing on all cylinders in the fourth quarter, blowing away analysts' estimates and posting gains in revenue and net income. The firm generated $4.5 billion in net earnings in the fourth quarter, or $12.08 per share, a huge increase over $4.69 in the fourth quarter of 2019. Net revenue was $11.7 billion in the quarter, an 18% year-over-year increase. The company's return on average common shareholders' equity (ROE) was 21.1% in the quarter. For the full year, earnings per share were $24.74, up 17.6% over 2019, while revenue was $44.5 billion, a 22% year-over-year increase. The ROE was 11% for the full year.
Goldman Sachs grew all of its business lines, led by investment banking, which saw a 27% increase year over year to $2.6 billion. This was due to a spike in equity underwriting and financial advisory services. This segment generated a record $9.42 billion in revenue for the full year, driven by a record level of equity underwriting and the second-highest level ever of debt underwriting.
Goldman Sachs had the most announced and completed mergers and acquisitions (M&A) of any firm last year. That strength should continue in 2021, as Goldman Sachs has a near-record level of backlog within investment banking. And with M&A expected to increase in 2021 in general, this market leader should benefit significantly.
All aboard
Investment banking only represents about 21% of Goldman Sachs' revenue. Global markets, the fixed income and equity trading arm, makes up 48%, while asset management accounts for 18% and consumer and wealth management represents 13%.
As mentioned, all segments reported gains. Global markets revenue was up 23% due to a 40% increase in equity trading amid market volatility. Asset management revenue was up 7% in the quarter year over year, while consumer and wealth management revenue climbed 17%. The consumer banking arm was the fastest-growing segment of the business, with revenue up 52% to $347 million. It's due to the continued growth of the Marcus online banking platform, which saw deposits increase 62% for the full year to $97 billion. Credit card balances were also up sharply because of the Apple Card, Goldman Sachs' first credit card.
Goldman Sachs also expects to see growth in its new transaction banking business, which it launched in 2020. Through transaction banking, Goldman Sachs offers banking services to corporations and financial institutions. It already has 225 corporate clients and roughly $30 billion of deposits. Moreover, it just signed a deal with payment processor Stripe to form Stripe Treasury. Through this partnership, Goldman Sachs' transaction banking payment and deposit solutions are embedded into Stripe's platform, making it available to Stripe's small business customers.
With market-leading positions (or close to it) in two segments, investment banking and global markets, and a focus on growing its banking business, Goldman Sachs is in a great position to grow over the long term. It has a great balance sheet with tons of cash, about $156 billion, up from $133 billion a year ago, and excellent ROE. This is probably the best value stock in the sector.
