Too Far, Too Fast? Goldman, Morgan Shares Have Doubled

Goldman Sachs and Morgan Stanley shares have climbed by about 114 percent in the last 12 months (as of yesterday's close). That begs the question: Are investors overly optimistic? Or is this just some momentum game traders are playing?

Opinions differ, of course. But I would be cautious. Goldman's and Morgan's recent performance was driven by taking on more risk (i.e. fixed income trading, a fickle beast indeed). But, Brad Hintz, former Lehman CFO and now an analyst at Bernstein, has an outperform on both (although he lowered earnings estimates on Morgan and raised them for Goldman on Sept. 30).

Of Morgan, Hintz wrote (on 10/22, his most recent research report on MS): "After three consecutive quarters of earnings losses, and lackluster performance in fixed income trading, the third quarter may prove a milestone in Morgan Stanley's turnaround story as they posted solid FICC revenues during the quarter a day after announcing the sale of their beleaguered retail asset management business to Invesco. Having addressed these key investor concerns, we are incrementally more positive on

the outlook of the firm over the next twelve months. However, we remain cautious about the integration of the firm's retail business with Smith Barney

[emphasis added] as a delay in this venture could cause a drag on earnings once the retail market begins to turn during the later stages of an economic recovery."

On Goldman, Hintz is decidedly more bullish. He wrote: Goldman Sachs announced Q3 EPS of $5.25 per share, handily beating our estimate and consensus expectations on powerful fixed income trading and solid merchant banking gains. Despite another strong performance from Goldman Sachs, investor attention seems to have already begun focusing on the future earnings power of the firm and the implications for further upside in the stock. Is the GS stock run over? Are earnings going to decline from here? We do not think so. We believe that GS "holds all the right cards" to continue to book superior performance through 2010. [emphasis added]

I suppose it all comes down to where you think the economy is going. It would appear investors believe we're on the mend. But as Steve Leuthold, the quantitative-oriented asset manager of the Leuthold mutual funds, wrote in his commentary published yesterday, "After a 64 percent advance in seven months, we have to be on the alert for non-consensus outcomes." (That said, Leuthold has allocated 70 percent to stocks, his most bullish stance allowed by his strategy.)