It has been a very good year for financial sector stocks in general, as the average share price in the sector is up 37.7% year to date (YTD) and 61% over the past one-year period through Oct. 26. Only the energy sector has outperformed financials this year.
One of the brightest stars in the financial galaxy over the past year has been Goldman Sachs (GS 1.78%), the noted investment bank. Goldman Sachs' share price is up about 56% YTD and over the last 12 months (as of Oct. 27), the stock price has more than doubled from around $195 per share to roughly $412 per share -- a gain of about 111%.
The good news for investors is twofold. One, Goldman Sachs has more room to run, and two, you can invest in it for a fraction of the share price through fractional share investing.
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Goldman Sachs generated near-record revenue in investment banking
Goldman Sachs' great run has been fueled by a couple of different things. One, it is the leading investment bank in the country, ranking No. 1 in merger and acquisition (M&A) deals with $1.4 trillion in announced deals it managed during the third quarter. The M&A market has been hot in general, and Goldman Sachs has taken advantage of that, growing its market share to 32%. The investment banking business generated $3.7 billion in net revenue in the quarter, the second-highest quarter ever, and it's up 88% year over year.
The other big revenue driver was its global markets business, which is its fixed income and equity trading arm. This business generated $5.6 billion in net revenue in the quarter, a 23% year-over-year increase, buoyed by continued market volatility, which leads to more trading activity. Goldman Sachs has been able to increase its market share in both equity and fixed-income trading.
The company also has a small, but growing, consumer and wealth management business, led by its online bank, Marcus. This business saw net revenue increase 35% year over year in the third quarter to $2 billion. The only business that saw a decline was asset management, where revenue was down 18% year over year to $2.3 billion. But overall, net revenue increased 26% in the third quarter year over year to $13.6 billion and net income climbed 60% to $5.4 billion.
More room to run, with a good valuation
After such a rapid rise in its stock price, some may think Goldman Sachs might be overvalued, but that is not the case. Investors have still not jumped on board as the stock is trading at about seven times earnings with a forward price-to-earnings ratio of 10.5. When you consider the efficiency of this company, with a return on equity of 22.1% and a ridiculously high operating margin of 55.3%, Goldman Sachs remains a great buy.
The consensus analyst estimate is for a share price target of $460 over the next 12 months, with a high-end estimate at over $575 per share. That is based on the fact that Goldman Sachs is No. 1 in investment banking with an M&A pipeline that is "significantly higher" than it was at the end of 2020, according to CFO Stephen Scherr on the third-quarter earnings call. The trading business is also poised to continue its growth with investments in technology, which set it apart from some competitors, and a client-centric focus, serving the needs of customers holistically as opposed to transactionally, CEO David Solomon explained on the earnings call.
This is a great company, available at a great valuation, with excellent earnings prospects -- not to mention a $2-per-share quarterly dividend at a yield of 1.92%. Its incredible run has priced it at about $412 per share, which may not be doable for some folks.
But you can invest in Goldman Sachs for as little as $1 through fractional share investing. Fractional shares allow you to invest by dollar amount, not share, so you could buy a small fraction of this stock -- whether its $1 worth, or $100 worth, and realize the same percentage gains (or losses) as a full share.
Realistically, you could start with even just a $50 investment, and add, say, $50 per month. In eight months or so, you'd have a full share, and then some, as you continue to invest. This is a great stock to consider, as a blue chip, that's relatively cheap, efficient, and has lots of growth potential.
