Playing Goldman Sachs (NYSE: GS) into Earnings

After Bank of America (NYSE: BAC) reported a loss of 60 cents per share (or $5.2 billion) – $2.8 billion wider than the $2.4 billion loss taken in the fourth quarter of 2008 (one year prior), one might think weakness may be creeping into the sector.  BAC stock has done a bunch of nothing since August regardless, not to mention that these results include $4 billion in TARP repayment, which clears BAC of that debt.

We also saw Morgan Stanley’s (NYSE: MS) earnings drop,  which reflected a decrease in trading revenue, while Wells Fargo (NYSE: WFC) turned profitable as well as Bank of New York Mellon (NYSE: BK), which itself reported a huge jump in profit from $66 million to $595 million for the quarter.

Certainly a mixed bag, but overall, positive in my opinion. Goldman Sachs (NYSE: GS), meanwhile, does NOT owe TARP any money and has been the best of breed and remained the strongest of the large wire houses throughout all of this.

Aside from what GS has done fundamentally, we must examine its recent price action.  GS rose as high as $178.75 in the past week or so, but has since come back to its current level of  $165.50, which is below both the 20- and 50-day moving averages, which may now pose some resistance, but not much being that we are up against an earnings report and the stock could be thrust sharply in either direction.  The 200-day simple moving average (SMA)  comes in right around $159.00 per share, which is also an area where I find technical support going back several months in time.  I also like the fact that $160 is a big round number  — humans tend to gravitate to round numbers and thus stocks also tend to do the same .

Analysts expect Goldman  to report earnings of $5.19 per share, which assuming stagnant growth, that’s about $20.00 per year and at a 10 multiple, that puts GS at $200.00 conservatively.  Of course, this is only an assumption.   Anything can happen, but I still remain cautiously optimistic on the economy as a whole.

Goldman Sachs also made the single biggest warrant repurchase of the banks thus far when back in July, they paid $1.1 billion to the government to repurchase their  TARP warrants.  Goldman does not owe anything in TARP, nor do they have any outstanding warrants, which is an added plus.

Historically, over earnings, GS is not a big mover.  Although there have been a few times GS has moved greater than 10%, this is the exception, rather than the rule.  I suspect a 5-6% move would be more realistic.  This earnings report will be one to watch and should also reveal Goldman’s strength or weakness in its trading activities.  I would guess that they won’t reap the great rewards they did earlier in the year with the volatility in the markets, and this will certainly dig into their overall profit picture as it did for Morgan Stanley.  Compensation is also a factor, with both firms increasing comp to record proportions.  It look likes $22.3 billion for GS for 2009.

Regardless, I think traders still like this stock, as do I and analysts also remain overall bullish.  I also feel good about the stock’s modest reaction to the selloff today.   As stated earlier, I feel strong support right around the $160.00 level, not to mention, I feel this is a reasonable valuation for Goldman, therefore, I am examining selling the February 160/150 put spread for 2.30.  This puts breakeven down at $157.70, or $2.30 below my support point.  It also gives the stock about a 5% cushion to fall from its current level.  As long as GS stays above $160 by February expiration, the trade stands to make 62% on its total risk of $3.70.

This may be an alternative to buying the stock outright ahead of the report.

For more on GS:

Call selling in Goldman Sachs (GS) ahead of earnings

Put Buyers Active as Goldman Sachs (NYSE: GS) Pulls Back