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Goldman Sachs –A Winning Play for Uncertain Times

April 22, 2010 | About:
Goldman Sachs shares have been hit hard and are trading with increased volatility due to the SEC’s charges of fraud concerning a tiny piece of their overall business. The news “is out”, the shares have already reacted, and estimates have been adjusted to reflect likely repercussions from the scandal. Early today I was able to snag some shares at $156.90 – well off their October 2009 high of $193.60.



Zacks now carries 2010 – 2011 estimates of $18.20 and $20.31 while Standard & Poors is at $20.79 and $22.10 respectively. Clearly, the shares are not expensive if you feel GS will maintain its ‘best of breed’ status in global investment banking. Using the low-end Zacks estimates GS shares were at just 8.6x this year’s and about 7.7x 2011’s expected earnings.

GS shares peaked at $206.70, $250.70 and $215.00 in 2006-2007-2008 and have hit highs of $193.60 and $181 in 2009 and recently this year. I see today’s price as a gift if you have a long-term horizon.

At the time I bought shares today I also wrote (sold) puts to generate immediate income and/or lock in great break-even prices should I be forced to buy more shares later at even lower than current prices. I held off on selling covered calls in order to wait for a rebound before locking in my upside.

Here are the trades I actually put on this morning:



Bought:


Price /share


Break-even




Goldman Sachs shares


$156.90


$156.90












Sold:


Premium /share


Break-even


Margin of safety*


Jan. 2012 $150 Puts


$24.40


$125.60


19.9%


Jan. 2012 $160 Puts


$29.50


$130.50


16.8%


Jan. 2012 $170 Puts


$35.50


$134.50


14.2%


* margin of safety = % break-even is below trade inception price

I feel confident that this whole SEC deal will BE well off investor’s radar screen pretty quickly and certainly it won’t be much of a factor by the January 2012 expiration date for the LEAP puts.

Maintenance margin requirements on the puts are approximately 20% of the net exercise price (assuming you keep the option premium in your margin-type account after the put sale).

If these puts expire in early 2012 (as I expect), and you leave these puts alone until expiration, you can also defer any capital gains taxes until April of 2013 when you file your Schedule D with your tax-year 2012 return. You get the cash flow staring tomorrow with about three years of tax deferred float should things go as hoped for.

In a ‘worst-case’ scenario I’ll be forced to buy additional shares of high-quality Goldman Sachs shares for 14.2% - 19.9% below this morning’s already discounted quote.

Once I see GS shares back up to more normalized levels I plan to sell some covered calls at strikes of at least $180 - $200.



Dr. Paul Price

www.BeatingBuffett.com



Disclosure: Author is now long GS shares and short GS LEAP puts for 2012.

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


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Comments

superguru
Superguru - 4 years ago
Getting even cheaper.

But does uncertainity here equals risk or opportunity?

How to figure that one out. Or just put it in too hard pile and move on.
Dr. Paul Price
Dr. Paul Price premium member - 4 years ago
I bought some shares and sold another put today on the weakness.
cm1750
Cm1750 premium member - 4 years ago
I sold a few May 120 puts today for $1.20 when GS was $146/share.

Tangible BV is around $117 so, if put to me, I am buying at about 1.0x tBV. Otherwise, I keep the premium, which is 1% return on risk capital for 3 weeks or 15% annualized.

Not a huge return, but a good use of excess cash while waiting for better long-term ideas.

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