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:
Goldman Sachs shares
Margin of safety*
Jan. 2012 $150 Puts
Jan. 2012 $160 Puts
Jan. 2012 $170 Puts
* 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
Disclosure: Author is now long GS shares and short GS LEAP puts for 2012.