May 13, 2011 / 1:24 AM / 8 years ago

UPDATE 1-Buy or Sell: Goldman Sachs

* Bulls see upside once regulatory, market challenges pass

* Bears say Goldman’s litigation risk is too high (Adds details on SEC, DOJ comment)

By Lauren Tara LaCapra

NEW YORK, May 12 (Reuters) - Goldman Sachs Group Inc’s (GS.N) shares traded near a nine-month low on Thursday as investors were spooked by the bank’s potential legal liabilities.

Goldman shares dropped as much as 4.9 percent, before regaining some lost ground and closing down 3.5 percent at $142.75. The stock was last at such levels in August 2010 and traded at about $160 in the beginning of April.

The recent sell-off began ahead of Goldman’s first-quarter earnings report in April, which failed to please investors. The decline accelerated in recent weeks on investor concerns about the threat of prosecution for Goldman’s actions during the financial crisis.

A Bloomberg poll released on Thursday indicated that 54 percent of traders, investors and analysts have a negative view of the company. But some contrarians see the recent sell-off as a buying opportunity. Here is a look at both perspectives:


Steve Shafer, chief investment officer for the Oklahoma City-based hedge fund Covenant Investors, said he was actively buying Goldman shares on Thursday.

Shafer argues that Goldman has unmatched talent in trading and banking on Wall Street. He thinks buying the stock today will seem prescient once the regulatory and economic landscape becomes clearer, and the negative headlines about Goldman Sachs have dissipated.

“The market is volatile, it’s short-term, it’s highly psychologically influenced,” said Shafer. “For us, this is a buying opportunity. We will be adding to positions today.

Covenant manages $270 million in assets and had initially bought Goldman shares for one long-term value fund out of the six it manages. But Shafer said Covenant was buying Goldman shares for its other funds on Thursday as well, because of attractive prices.

Shafer expects the bulk of Covenant’s Goldman position to be held for a period of three to five years. He thinks the stock is cheap based on several metrics, including price-to-book ratio, price-to-earnings and cash flow.

“We look at Goldman as a long-term investment, as opposed to a trade,” he said, adding that Covenant is seeking returns of 15 percent to 20 percent in the position.


Jason Ware, who keeps track of Goldman’s stock for mutual fund firm Albion Financial Group, says a combination of business challenges, regulatory pressures and high litigation costs make Goldman shares too risky to buy right now.

Ware points out that Goldman’s first-quarter report showed that the company has been struggling to boost revenue. Subdued market activity and hefty competition have put pressure on Goldman’s trading and banking businesses.

The analyst is also wary of intense scrutiny on Goldman Sachs from lawmakers and regulatory agencies.

Goldman is currently being investigated by the Commodity Futures Trading Commission, the Financial Industry Regulatory Authority and Massachusetts state regulators.

The U.S. Justice Department and the Securities and Exchange Commission are reviewing a Senate subcommittee report to see whether they want to investigate further or pursue charges.

The company settled civil fraud charges with the SEC last year for $550 million related to a crisis-era derivatives deal. A critical report from the Senate Permanent Subcommittee on Investigations last month brought similar issues to the fore once again.

“It’s a stock that we don’t have any interest in taking a position in because of the ongoing legal action around the firm,” said Ware. “It’s just not a good time, in our view, to be involved in the shares.” (Editing by Steve Orlofsky)

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