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Tuesday, August 29, 2006

Has Goldman Sachs Gone Too Far?

Stocks: (GS)(LEH)(BSC)

Small red flags are appearing in Wall St’s view of Goldman Sachs, the global gold standard for investment banks. Goldman’s stock traded below $100 in May 2005. It rose to $169 this May and now trades at about $150. The company’s earnings certainly justify the move. In the quarter ending May 26, revenue hit $18 billion. Net income was $2.3 billion. By way of contrast, Lehman Brothers did $11.5 billion in revenue in the last quarter and had operating income of $ billion. Bear Stearns did $4.3 billion and had operating income of $539 million in its last quarter.

Barron’s wrote last week that investment banking stocks may be driven down by a slower economy, poor stock market performance and the fact that private equity deals cannot keep their pace forever. A drop-off in M&A may also hurt Goldman’s financials. All of these things will happen at some point, it simply leaves investors to guess when Goldman may fall victim to its own fabulous growth.

The single largest concern about Goldman has to be its trading operations where a wrong bet or two and the market’s increasing volatility drive a high probability that something will go wrong in that large segment of Goldman’s business. As Morningstar pointed out this week: “Goldman's greatest risk is the potential for large losses on its trading portfolio.”

Goldman is likely to be the leading firm in its industry for decades to come. But, it is unlikely to sustain the kind of stock price growth it has had over the last 18 months. At some point “what can go wrong, will go wrong.”

Douglas A. McIntyre can be reached at He does not own securiteis in companies that he writes about.

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