Daily Stock Pick: June 17th, 2021

Stocks were under pressure again this morning after yesterday’s afternoon decline.  Fueling yesterday’s sell-off was the Federal Reserve’s decision to raise its projected rate of inflation for this year to 3.4%.  The Fed also stated that it would move up its time line for rate hikes.  Internal projections now show that the central bank’s first rate hike could be sooner than we all thought.   

As inflation rises, interest rates rise, and that’s good for banks, which make more money along with the expansion of the spread between rates they pay on deposits and rates they charge on loans.  Which means the financial sector will likely benefit from any rate hikes.  But the firm featured in today’s trade alert has a couple things going for it aside from being in the right sector. 

What makes Goldman Sachs (GS) stock so appealing is that it trades for just nine times earnings despite analysts expecting almost 17% EPS growth annually over the next five years.  That makes for a price-earnings growth ratio of just 0.55, reflecting extreme value.  GS is holding a forward P/E ratio of 8.6, a discount when compared to the industry average forward P/E of 12.29

Plus, while many large banks pay high dividends, Goldman pays a modest 1.4% and uses just 12% of earnings to do so, meaning it has ample room to grow its payout in the years to come.

Of 25 analysts offering recommendations for GS stock, 16 rate the stock a Buy and 7 call it a Hold.  Only 2 of the Wall Street pros covering the stock give it a Sell rating.  Jefferies Financial Group analyst Daniel Fannon recently initiated coverage of Goldman Sachs with a Buy rating as he sees more durable revenue streams and more efficient internal capital allocation driving higher returns and multiple expansion.  Fannon set a $450 price target for the stock, implying upside potential of around 22% from yesterday’s close.  The target assumes an 11x multiple on 2023 EPS, consistent with its five-year average.  “With all of its business segments either producing outsized returns or in the process of scaling and generating an improving return profile this multiple could prove conservative,” Fannon wrote in  a note to clients. 

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