When Goldman predicted that oil would surge to $100 and beyond back in 2006, many Fools laughed -- until oil did just that. And when Goldman followed up its $100 prediction with a call for $200 oil just two years later, investors actually bid up oil futures, helping Goldman to fulfill its own prophecy. (Almost.)
For good reasons or ill, this banker's opinions move markets. Even if you don't agree with Goldman, it's worth keeping an eye on what the firm is up to.
Sticks and stones may ... break your portfolio
Investing in "stick-built" homebuilders during the Mortgage Market Apocalypse did more damage to more investors' portfolios than almost any other decision they could have made. But according to Goldman, the damage has been done -- sticks and stones can no longer hurt you.
Despite downgrading Toll Brothers
Nor should investors necessarily flee the stock on news of the downgrade. As you may recall, Goldman also downgraded Meritage last month (removing the stock from its "Conviction Buy" list, but maintaining a less enthusiastic buy rating on the stock). And it's good that Goldman stopped short of selling. Since the "downgrade," Meritage's stock has simply crushed the market, returning a 27% profit to those who held firm, against a 2% gain for the S&P 500.
Goldman rolls the dice
Goldman may have lucked out on Meritage, but will luck remain a lady for the world's most famous banker? Gambling investors will doubtlessly hope so, as they place side bets on three of Goldman's latest wagers.
On Monday, the megabanker upped its estimates for three of the nation's biggest gambling houses: MGM Mirage
MGM's prospects appear brighter -- at least, according to Goldman. Here, the firm sees an opportunity to buy a stock worth $16 (based on a "sum-of-the-parts" analysis) for the mere $12 it's fetching on the open market. Goldman argues that although MGM's numbers do look bad right now, they're "less bad" than they were. Moreover, the banker believes profit today is at "trough levels," and with Vegas currently entering the "very early stages" of a recovery, MGM shares are sure to rise as the recovery takes hold.
My advice? Don't bet on it
Fools, Goldman's argument might have made sense a few weeks ago, when we were looking at unemployment figures showing a loss of "only" 11,000 jobs. While that was lousy news in and of itself, pundits started calling this the beginning of the end of the Great Recession.
Sadly, December's jobs report put the kibosh on such thinking. No sooner had the New Year begun than we met the grim statistic of 85,000 jobs lost in December. People are still hurting out there, Fools, and with paychecks slim and getting slimmer, I fear Goldman's "trough" still lies ahead of us. Until Americans start getting their jobs back, and cashing paychecks, I find it hard to believe we've hit bottom.
This bodes ill for both MGM and Goldman's upgrade of it. Far from being the best pick in the industry, as Goldman apparently believes, MGM just might be the worst. While Las Vegas Sands sells for 65 times this year's earning's, and Wynn carries a nosebleed 119 multiple to forward estimates, MGM has no P/E at all. No profit last year. None expected this year. In fact, if you poll the two dozen-odd analysts who track this stock, you'll find a broad consensus that MGM won't earn a profit any time between now and at least 2014.
Meanwhile, of the big casino operators, MGM's the most leveraged, bearing net debt equal to more than twice its own market cap. The company's so in hock, in fact, that over the last 12 months, it didn't generate enough operating profit to even cover the interest payments on its loans -- much less leave any profit for shareholders.
If Goldman Sachs wants to lay a wager on MGM Mirage, hey, it's a free country. As long as Goldman's using its own money, more power to it.
The rest of us know better.
Fool contributor Rich Smith does not own shares of any company named above. Meritage Homes is a Motley Fool Stock Advisor recommendation, and MDC Holdings is a Motley Fool Hidden Gems pick. The Fool has a disclosure policy.