Was Goldman's Selloff Just What Was Needed To Make Shares Attractive?

Goldman Sachs Group Inc GS's surprisingly poor earnings report this week and the stock's subsequent selloff prompted analysts at Citi to upgrade the bank.

Citi's Keith Horowitz upgraded shares of Goldman Sachs from Sell to Neutral with an unchanged $225 price target. According to the analyst, the "disappointing" first quarter report now makes the risk to reward profile on the stock "more balanced" which warrants a Neutral rating.

Horowitz believes investors weren't discounting the volatility in the firm's trading results. In fact, while the fixed income performance was "disappointing" it would be a mistake for investors to extrapolate these results.

Beta

Horowitz argued Goldman's stock is also trading at a "more appropriate" valuation versus the entire banking group. Specifically, at Goldman Sachs' peak, the stock boasted one of the lowest betas of the G-SIBs (Global Systemically Important Banks) at 1.05 (versus an average of 1.02) which implied it was expensive as historically higher betas in the group have a higher risk profile.

But now that the stock is trading with a beta of around 1.22 (versus an average of 1.12) the gap between the company and the group narrowed which implies less of a valuation differential relative to its peers.

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