The Bullish Case for Goldman Sachs

Is this Goldman's time to shine?

Goldman Sachs Group

Shares of Goldman Sachs rose as much as 4 percent in trading Monday morning, as investors considered a bullish argument for the firm that appeared in Barron's this weekend.

The Barron's article, which predicted that Goldman's stock price could rise at least 25 percent within a year, was the latest piece of positive analysis for the Wall Street firm. After suffering some setbacks in the aftermath of the financial crisis, Goldman is now poised to beat out its rivals in investment banking, wrote Steven M. Davidoff in his Deal Professor column last month.

Barron's got right to the point in its headline: “Time to Buy Goldman.”

“The negative perception of Goldman is far more dour than the reality justifies,” the magazine said in the cover story, which was published over the weekend. “The company maintains an abiding leadership position in most of its activities, and is financially sturdi er and less burdened by irrational competition than it was a half-decade ago.”

The prediction about Goldman's stock price, Barron's said, was “based on the likely outlook for capital-markets activity and Goldman's ability to continue growing its book value.”

Investors seemed to take that view to heart on Monday, pushing Goldman's shares above $118. The shares closed Friday at $113.68.

The stock, though, remained short of an important threshold: $126.12, which represents the firm's so-called tangible book value as of the end of June. Goldman and its rivals on Wall Street have been trading below what their balance sheets say they are worth, as investors fret over new regulations and other legal risks.

That more cautious view was given voice on Monday by another financial publication, The Financial Times. “The banks are struggling to identify a new cash cow that grazes between the new rules,” reads an article in Monday's paper. “The equivalen t of the junk bonds of the 1980s or the credit derivatives of the 1990s has not been discovered.”

Indeed, as the Deal Professor noted, Goldman hasn't been immune from the weak market and other forces affecting its rivals. Its profit fell 12 percent in the second quarter, and its return on equity, a closely watched gauge, dropped to 5.4 percent, compared with 12.2 percent in the first quarter.

Still, the firm is confident in its own abilities. Wall Street moves in cycles, and the firm is positioned to benefit, Goldman's president, Gary D. Cohn, told The Financial Times.

“A lot of firms have laid off expensive derivatives talent,” Mr. Cohn said, “so they're not tooled for that part of the cycle.”