Meredith Whitney’s “Buy Goldman Sachs” Call Lifts Market, But Comes A Little Late

My frequency of posting has diminished here lately, mainly due to the fact that not much interesting seems to be happening (at least from my perspective). I always err on the side of posting less rather than writing just for the sake of doing so without having much to say.

Stocks are rising smartly today after renown banking bear Meredith Whitney (now at her own firm) actually had positive things to say about investment banking giant Goldman Sachs (GS), upgrading the stock to a “buy” and raising her price target to $186 per share. GS shares are trading up 7 points to $149 each.

While the market is making a big deal about this call today, we have to remember that everyone knows Goldman Sachs is firing on all cylinders lately, so this should come as no surprise. Getting in the stock ahead of earnings (especially on an up seven point day) may backfire for some people tomorrow (GS reports earnings tomorrow morning) who are getting excited about Whitney’s bullish note.

Frankly, the best time to get into Goldman was when the stock was down a lot (you know, when Warren Buffett bought a 10% preferred from the company and got equity warrants). As you can see from the chart below, GS shares had a huge move down, and even before today had made a ton of it back already.


While Whitney’s call looks late to me, she has taken earnings estimates well above consensus, which makes the stock by no means expensive even at $149 per share. Whitney’s 2010 profit estimate is nearly $20 per share, so there is no reason the stock couldn’t trade higher from here if she is right. Still, I would have loved this call had it come when the stock traded below $50 near its low, or even after a double to $100. Now it has already tripled.

In terms of the large commercial banks, Whitney appears to be hedging her bets (probably because deep down she knows that the worst is behind us for the banking sector). She is bullish near term (thanks to a booming mortgage business), but bearish long term. This seems like a hedge because, if anything, logic would dictate one being bearish on banks in the short term (while the economy is still in the dumps), and bullish longer term (because the recession is certain to end).

Part of her long term bearish view is the fact that she thinks the unemployment rate is going to reach 13-14 percent. It seems odds for a banking analyst to be making predictions like that. Not that economists are any good at forecasting the jobless rate (they’re not at all), but to think the unemployment rate will rise another 4% from the current 9.5% seems overly negative to me, especially given the source. After all, many people are expecting positive GDP as soon as the third quarter of this year.

All in all, I think the market is placing too much importance on Whitney’s comments this morning. Not much has changed, really. We already knew Goldman was printing money, mortgage refinances were doing well, and that the economy was still rather poor. It seems like Whitney is making both bullish and bearish comments at the same time to cover her bases.

As a result, I don’t think there is much to go on from her views at this point. Unless you think the economy will never recover (and the unemployment rate will hit 13 or 14 percent), I would just buy your favorite bank stocks at attractive prices and hold them for a few years. There is still plenty of money to be made in the sector if you have patience.

Full Disclosure: No position in GS at the time of writing, but positions may change at any time

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2 Thoughts on “Meredith Whitney’s “Buy Goldman Sachs” Call Lifts Market, But Comes A Little Late

  1. There are typos on your post, tisk tisk. but more important, just because we have positive gdp growth after such a large drop does not indicate unemployment cannot go higher. There is no logic to your thought there.

  2. Chad Brand on July 14, 2009 at 11:25 AM said:

    I agree it can (and will) go higher. After all, the unemployment rate is a lagging economic indicator and therefore should peak after GDP troughs. Still, if we go from -6 GDP to -3 to flat, don’t you think job losses will moderate meaningfully? When the recession began in December 2007 unemployment was 5%, versus 9.5% today. Getting to 13-14% implies we are only halfway there so far. I just think we will see the rate of change decelerate over the next 18 months (versus staying the same) as we head toward flat or slightly positive GDP.

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