You know your stock has got to be “cheap” or “undervalued” when Warren Buffett steps in. That is exactly what happened after the market closed on Tuesday as Berkshire Hathaway (BRK-A, $128,800, down $2,200) announced it is investing at least $5 billion in Goldman Sachs (GS, $125.05, up $4.27). This is a pretty big deal and the market must have gotten wind of this before the final bell.
I had mentioned that some of the financial stocks were getting near our targeted areas yesterday and Goldman was quickly becoming my favorite one out of the bunch for a couple of reasons. First, best of breed. When it comes to owning an investment firm, Goldman tops my list. Secondly, Goldman Sachs (and Morgan Stanley) was one of the last two independent investment banks on Wall Street.
However, just two days ago both companies got the A-okay from the Federal Reserve to change their status to “bank holding companies.” This move gave Goldman broader access to borrow money and the ability to build a base of solid deposits.
Berkshire Hathaway’s investment in Goldman could double as the company also got warrants to buy another $5 billion in Goldman’s common stock. The first $5 billion is in Goldman’s “preferred stock” which will pay 10% and can be bought back by Goldman at any time for a 10% premium. The warrants allow Berkshire to buy $5 billion in common stock at $115 per share any time over the next five years. Goldman also said it would raise another $2.5 billion in its own public stock offering. Basically, Goldman just got the green light to print money.
The $115 tag is exactly what the shares were trading for when I did the blog yesterday. The point is not to toot my own horn but to let you know what is working in this market and what isn’t. The news sent shares of Goldman Sachs higher and the futures soared last night on a day the Dow posted another triple-digit decline.
Goldman reacted well in after-hours trading, up $9.70 to $134.75. That’s a 20-point move from lunchtime yesterday. The October 135 calls (GSJG, $6.90, up $0.10) traded as low as $3.80 yesterday. They will certainly see a big pop if last night’s gains hold.
Goldman Sachs’ shares had been falling at a rapid pace before the government announced its rescue plan. The bears were obviously targeting Goldman as they figured it would be the next General to fall during this financial war of bad debt. Now the question is if the SEC and/ or the government will have to look into Wall Street cashing in on our taxpaying money.
Here is what Mr. B said of the company…”Goldman Sachs is an exceptional institution. It has an unrivaled global franchise, a proven and deep management team and the intellectual and financial capital to continue its track record of outperformance.”
Maybe the Geico lizard is showing up on Goldman early but rarely does Mr. B make a mistake. Especially one of this magnitude. You think he is risking $10 billion on a stock going nowhere? His favorite quote of mine is: “I will tell you how to become rich…Be fearful when others are greedy. Be greedy when others are fearful.”
Is that what we are seeing now? I mentioned back in August that September and October were historically bad months for the market and so far that has played out like Charlie Daniel’s fiddle. I’m not sure how bad October will be because no one has a crystal ball for the market. What I think could happen is a lower market into October and then a huge rally. And again, I’m just going by history and how this the market appears to be setting up.
I think once the details of how this $700 billion is going to be taken care of, the market will rally. And it could rally big-time. We also have the election which is usually bullish plus earnings season is right around the corner and we could get some surprises. Wall Street has lowered the bar so far that many companies could easily blow-away expectations.
As far as the other financial stocks, they rebounded as well:
Citigroup (C, $19.99, down $0.02) was at $18
Morgan Stanley (MS, $28.00, up $0.91) was at $25.36
Wachovia (WB, $14.75, down $1.85) hit a low of $14.01 but still ended lower by over 10%.
Of the three, Morgan Stanley looks to be the “safest”. Although risky, I think Morgan could ride Goldman’s coat tail on this one. Watch the Morgan October 30 calls (MSJF) this morning. They closed at $2.55.
Note: I gave a quote for Berkshire Hathaway’s Class A stock which is correct, it is currently going for $128,800 for ONE share but the Class B shares are a little cheaper…(BRK-B, $4,300, down $55.00) a share…
Rick Rouse
Rick@OptionsMentoring.com
