By Robert Hauver
Although Goldman isn’t one of the High Dividend Stocks that we normally cover, some investors may want to consider making a bullish options trade on them, by selling covered calls or cash-secured put options. Either of the following 2 trades will deliver a substantially lower break-even entry point that’s below GS’s long-term moving averages.
Another consideration is Goldman’s current valuation. With their recent closing price of $144.83, GS has some pretty attractive valuation metrics already, compared to its competitors:
|
Ticker |
P/E |
PEG |
P/S |
P/B |
P/Cash |
P/Free Cash Flow |
|
Goldman Sachs |
6.04 |
0.67 |
1.38 |
1.02 |
2.75 |
2.16 |
|
Deutsche Bank |
5.75 |
1.15 |
1.06 |
0.75 |
2.98 |
1.62 |
|
Jeffries |
15.44 |
1.63 |
1.48 |
1.74 |
19.77 |
1.83 |
|
JP Morgan |
15.39 |
1.97 |
2.17 |
0.95 |
5.01 |
1.78 |
|
Morgan Stanley |
93.72 |
9.76 |
1.08 |
0.79 |
6.35 |
8.64 |
|
AVERAGE |
32.575 |
3.6275 |
1.4475 |
1.0575 |
8.5275 |
3.21 |
Their PEG ratio of .67 would be attractive compared to most industries, and their Price to Cash and Price/Free Cash Flow are also solid for their peer group, not to mention the outsized earnings they’ve been reporting recently. However, many investors would be quite leery of being long such a controversial stock, given the recent “Main St. vs. Wall St.” backlash in DC, and the ongoing financial reform legislation hearings in Congress. With that in mind, here are 2 ways to hedge your bet on Goldman:
Here’s a Covered Call trade that has a break-even of $125.13:
| Stock Price | Dividends Pre-Expiration | Call Strike Price/Expir-ation Month | Call Bid Premium | Static Yield (Call + Div.) | Static Yield Annual-ized | Total Potential Assigned Yield Annual-ized |
| $144.83 | $.70 | $145/Jan.2011 | $19.00 | 13.6% | 21.3% | 21.4% |
This Cash-Secured Put Selling trade has a break-even of $128.03 :
| Stock Price | Put Strike Price/Expir-ation Month | Put Bid Premium | Put Yield | Put Yield Annual-ized |
| $144.83 | $140/Jan.2011 | $16.80 | 12% | 18.7% |
(Put Yield is based on 100% Cash Reserve)
The break-even points on both of these trades are also considerably below analysts’ current estimates for Goldman, which range from $160.00 to $235.00.
Of course, in addition to the “moral hazard” debate about GS, there are many other issues and questions involving Goldman: does the SEC have a strong case; will the Feds make Goldman a sacrificial lamb for political reasons; and, moreover; will the final version of the financial reform legislation seriously impact their earnings. One final thought: It wasn’t so long ago that a certain savvy investor from Omaha bet on Goldman, when their future and their competition’s futures looked a lot grimmer than they seem to look now.
Disclosure: Author is short GS puts.
Disclaimer: This article is written for informational purposes only.