Why I Purchased Goldman Sachs (GS) Friday

Last Friday I purchased Goldman Sachs Group (GS) as the markets quickly recovered from month lows and broke to the upside as earnings season got underway. This was after GS reported great earnings that beat expectations by 40% with analysts increasing their expectations for future quarters and the year.

Markets Jump

What a difference two weeks make? Prior to the start of earnings season the indexes were slowly falling to new month lows and signaling a sell. But a number of companies have beaten their expectations including Goldman Sachs (GS), Johnson & Johnson (JNJ), JPMorgan Chase (JPM), and International Business Machines (IBM) giving the bulls reason to buy.

Earnings Expectations

The case for Goldman Sachs is fairly strong. For the quarter ending September 2009 analyst have increased their expectations for the company’s earnings from $2.08 a share to $3.30 a share. This is an increase of 59%. The stock itself has moved from $125 to $165 a share which does represent an increase of 32% but not equal to the earnings increase.

The Trade

The trailing price to earnings ratio is currently 37 with the forward price to earnings at 10. Earnings increases could reach 82% for the current quarter and 183% for the next quarter. These increases would make the P/E conservative. Analysts have an average price target of 173.5 for the year. With the markets moving higher and Goldman Sachs being one of the strongest in it’s industry, holding GS until the end of the earnings season is a trade that I wanted to make.

CIT Group Inc (CIT), Another Bank Fails

Just when you thought it was safe to buy financials, another back falls into bankruptcy and their stock goes to zero. The common stock of CIT fell close to 75% today as it struggles to stay afloat and looks for a reported $2-3 billion in financing. Along with CIT, insurers and banks are taking a hit with Aflac, Genworth, Lincoln Financial, and Conseco falling on their perceived exposure to the large commercial bank.

Overall Market Direction

Prior to the news of the demise of CIT, the market had rallied from a selling point around 1745 on the Nasdaq to a buy position above 1850 on the index. Over the week, the Dow Jones Industrial gained over 5% as the earnings season kicked off and investors felt better about the economy and company results. But the CIT news and weak regional manufacturing caused a pause in the rally for today.

If you feel like gambling, the CIT options have seen a large spike in volume today at Call strikes of $1 and $2 in addition to Put strikes on $1 and $2 in the closest months. Otherwise staying on the sidelines until there is a clear direction in the overall market is not a bad ideal. The markets could rally for a couple more weeks as good earnings numbers are released by varying corporations. But the downward trend is likely to resume as the end of the reporting season nears.

Amgen (AMGN) Jumps Higher in Shaky Market

Amgen moved higher today, close to 14%, on news that a bone-related drug trial had a positive outcome. But the company isn’t currently growing and the overall market is looking weak going into earnings season. The Dow Jones Industrial Average, the Russell 2000, and the S&P 500 have recently turned negative with the Nasdaq Composite looking to move into a selling position soon.

Denosumab

Amgen’s osteoporosis drug Denosumab was able to prevent bone injuries for breast-cancer patients in recent trials. The drug could possibly be a blockbuster drug and allow revenue to begin increasing again which has been flat to down in recent quarters for the biotechnology company.

Short Opportunity

The company’s current quarter is estimated to show a small increase in earnings compared to last year while next quarter is expected to show a 5% drop year over year. Revenue is set to decline near 5% for the current quarter, the next quarter, and the full year compared to the same periods in 2008. With the companies price to earnings ratio at 15.35 the jump in share price looks like a near term opportunity to short the stock as the new drug will not benefit revenue or earnings soon.

Alcoa Inc (AA) Breaks Down before Earnings

Alcoa Inc. (AA) moved lower on Thursday as commodities across the board struggled and the overall market fell as jobs data lead many to disbelieve the 2nd quarter will represent a turnaround in the US economy. The stock fell 4.73% to break below an early lower for the past 30 days of $10 a share. The company is set to announce their earnings on July 8, Wednesday of this coming week.

Revenue and Earnings

Revenue and Earnings estimates for the company have been reduced over the past three months with 2nd quarter earnings now expected to be a loss of 34 cents. This represents a decline of 151% from the earnings of the same quarter a year ago. Revenue is also expected to show a decline with the current estimate at a reduction of 48% compared to last year’s 2nd quarter.

Beginning of Earnings Season

The company has missed it’s earnings estimates the past three quarters, missing by 2 cents in March. The Alcoa report represents the beginning of the 2nd quarter earnings season which should provide the markets with direction up or down going forward. If both Alcoa and Chevron (CVX) provide disappointing earnings this coming week, the markets could fall for the week giving investors a trade for the final 2 days.