I bought Goldman Sachs (GS) at $155.17 on 15th April 2011. The stock trended downward through April and May and on 22nd May I predicted that the legal risk (real or perceived!) relating to Goldman’s actions during the 2007 mortgage bubble and 2008 stock market crash would drive the stock down to $100.
Today the stock traded as low as $110.04 with no bottom in sight. Goldman is indeed being sued by National Credit Union Administration over risky mortgage securities, but legal risk is the least of Goldman’s troubles. It seems that we are looking at a new recession in the US and significant debt-related risk in European banks. Both of these issues are significant risk factors for banks such as Goldman.
I have struggled with this decision more than any other. It’s tough to take a loss on a stock that looked so promising on paper, but I have to set aside my emotional need to hold until the stock comes back and make a fact-based decision. It’s time to sell.
What to do with the proceeds? We look for non-cyclical, non-financial stocks with minimal European exposure and a significant yeild. There are few better than Kinder Morgan Energy Partners (KMP), which operates pipeline systems and offers a 6.6% yeild at current prices.
- SELL Goldman Sachs (GS) @ US$114.00
- BUY Kinder Morgan Energy Partners (KMP) @ US$70.05
One month after these trades, on 10th September 2011, this looks like a good call. Goldman Sachs is down 13% since I sold while Kinder Morgan is down only 2%.
Goldman Sachs is now down to US$102 on global debt worries and mortgage bubble lawsuits. This is very close to the prediction I made back on 22nd May 2011 that Goldman would be beaten down to US$100 before recovering.
Goldman broke US$100 today, 12th September 2011.