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7 Things You Need to Know About Goldman Sachs

By John Grgurich - Apr 23, 2013 at 10:21AM

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The bank the liberal press loves to hate, and the one more investors should learn to love.

Goldman Sachs (GS -0.78%). It's the bank the liberal press loves to hate, but a bank more investors should learn to love.

The Wall Street investment house almost always seems to make money, no matter what's going on with the rest of the economy, which is one of the primary reasons it attracts such suspicion and derision, and one of the primary reasons it's such a great place to put your money.

Without further ado, then, here are seven things you need to know about Goldman Sachs, in no particular order.

1. Outstanding share-price performance over the past year
Shares prices in the Wall Street powerhouse have gone up by 24.13% in the last year. Compare this with JPMorgan Chase (JPM -0.55%), where shares have risen by just 10.22% in the same time period: a strong performance, to be sure, just not Goldman strong.

2. Strong first-quarter earnings
For the first quarter of 2013, Goldman reported a 7.2% year-over-year rise in net income on revenue growth of 1.4%: this in a tough quarter for banks. Wells Fargo's (WFC 0.66%) revenue edged down by 1.4% for the same time period, while JPMorgan's dropped 3.87%. 

3. Warren Buffet loves Goldman
At the height of the financial crisis, Warren Buffet -- CEO and COB of Berkshire Hathaway (BRK.B -0.69%)-- invested $5 billion in the then-wobbly Wall Street powerhouse, which gave him the option to buy 43.5 million shares at $115 each.

On March 26, Buffet announced that rather than cashing out -- which would have netted him an immediate $1.4 billion -- he would use his "warrants" to purchase even more stock: staying in the company and becoming a top 10 shareholder. Now that's confidence. 

4. Great return-on-equity
ROE tells gives you some idea of how much profit a company is generating with shareholder money. For the first quarter, Goldman is reporting a return-on-equity of 12.4% . Investor-darling Bank of America (BAC -0.45%) has an ROE of just 2.62%. 

Goldman even beats JPMorgan on this metric, which has an ROE of 11.55%. In this post-crisis era, anything north of 10% is good, but 12.4% is particularly strong.

5. Attractive valuation
Price-to-book ratio gives you some idea of what a company would be worth if it went bankrupt and sold immediately. You want the P/B to be low -- ideally under 1.0 -- but not too low; that could indicate there's something fundamentally flawed with the company.

At 0.96, Goldman's P/B is just right, signaling a good bank at a bargain price. B of A has a P/B of 0.57; to me, that's too low and is a red flag versus Goldman's green light.

6. Great leadership
The more and more I look at companies and pore over metrics, earnings reports, and analyst recommendations, the more I look at leadership. The CEO sets the tone for any company. Think about what Steve Jobs meant to Apple, what Warren Buffet means to Berkshire Hathaway, or what Howard Schultz means to Starbucks.

Goldman CEO Lloyd Blankfein is smart, but not arrogant. How could he be? The son of a postal worker, he grew up in a tenement house in the Bronx and started out at Goldman as a commodities trader. And he's managed to keep the company profitable even through the worst of times. Given that he came on in 2006 -- not too long before the financial crisis struck -- that's saying something.

Lloyd Blankfein is Goldman's guiding force, and investors should be grateful for it.

7. Still the leader in investment banking
According to its first-quarter earnings report, Goldman "continued its leadership in investment banking, ranking first in worldwide completed mergers and acquisitions for the year-to-date." This seemingly little bit of news is bigger news than it first appears.

Though it had to officially change its status to a "bank-holding company" at the height of the financial crisis to get access to the Federal Reserve's discount window, Goldman is still an investment bank at heart, and it will need to continue excelling at investment banking to stay profitable into the foreseeable future. And it appears to be doing just that.

Foolish bottom line
Don't invest in Goldman Sachs just because Warren Buffet does. Invest in Goldman Sachs for the same reason Warren Buffet does: It's a company that figures out how to make money no matter what else is going on, and no matter what anyone else thinks. 

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Stocks Mentioned

The Goldman Sachs Group, Inc. Stock Quote
The Goldman Sachs Group, Inc.
GS
$311.50 (-0.78%) $-2.45
Berkshire Hathaway Inc. Stock Quote
Berkshire Hathaway Inc.
BRK.B
$307.03 (-0.69%) $-2.14
Bank of America Corporation Stock Quote
Bank of America Corporation
BAC
$35.49 (-0.45%) $0.16
JPMorgan Chase & Co. Stock Quote
JPMorgan Chase & Co.
JPM
$125.66 (-0.55%) $0.70
Wells Fargo & Company Stock Quote
Wells Fargo & Company
WFC
$43.58 (0.66%) $0.28

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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