GS: Expect fireworks but investors know it is 4th of July.

In my previous message dated 11/22/06, I indicated GS is on a path to have one of the best Q in terms of earning. I believed that the company will have a blowout Q, beating the consensus estimate by a wide margin. I bumped up my price target to $230 from $200.

http://www.investorhives.com/msgd.php?msg_...

At that time, I told you guys that the stock would decidedly break above $200 level as investors anticipate great earning from the company. Although the stock remained volatile over last two weeks, the stock is now at $205 and a change and some of you who have been playing with options or the stock may have racked up some nice gain. What do we do now heading into the earning on Tuesday morning?

Two weeks ago, the mean consensus EPS estimate for the upcoming Q was somewhere between $4.9 to $5. However, in the matter of two weeks, we have seen torrid upward earning estimate revision by many analysts. Now according to Yahoo mean estimate number, the consensus EPS stands at tall $6 a share. Ahead of the earning, Smithbarney raises to the target to $200 from $155 and bumps up the EPS estimate for the Q to be $6.65 while maintaining hold rating. S&P raises the target by $10 to $230 and adds the stock to top ten portfolio stock list. A small research firm Buckingham Research Group ups the target to $256, citing higher than expected income from M&A activities and IPO deals in Asia and Europe in coming months. Prudential also increased the target price to $215, citing gains from ICBC investment.

While I still continue to expect robust earning performance that will even beat the elevated estimate, investors are also expecting this and the higher EPS estimate largely reflects very robust business environment that GS had in M&A and IPO market in the US and in Asia. Due to substantial earning revision, chance for the blow-out for Q is less likely. However, it is still possible that GS will probably beat the estimate number by a solid margin (probably ~ 15 to 20 cents).

In my opinion, real surprise will come from the guidance and this is where investors should focus to determine the near term stock price movement. Currently, investors expect that GS cannot sustain this level of earning performance for next year and the company will see 10 to 15% earning depreciation from the current level. While this year's estimate is roughly anywhere between $19 to $20 EPS, for the next year, the estimate remains in the range of $17 to $18. However, even at this reduced expectation, the stock is trading just above PE of 11 on a forward basis. So this is not an expensive stock.

Furthermore, I believe that the estimate for next year's earning is too low. Next year is the third year before the presidential election and the stock typically performs the best during this year. In addition, prior to 2008 Olympics, I expect extremely strong Chinese equity market that will fuel very robust IPO deals. No investment firm is better positioned in China as GS is. Finally international exposure of GS may help the firm to rack up substantial currency gains. If Fed eases the interest rate by late next year, PE multiple will likely to expand to 13 to 14 level and with EPS that may exceed $18 next year, the stock may test $250. So we still have some solid upside from the current level.

Although GS is heading into the earning with increased expectation, I believe you should not sell all of your shares into strength. If you are an option player (I know some of you have racked up more than 100% gain), I suggest you sell half of your position and let your free money work for you. If you are a stock holder, I may take some off the table to add more shares in case of price drop after the earning: however, I would still hold onto the good portion of your GS holding. I expect favorable guidance from the management and this is where the surprise will be. Even in the case of stock price drop due to largely in-line Q, you will get a great chance to add additional shares. Seems like we cannot lose on GS..