Why Goldman Underperformed Bear

Doncha just love commentary on share-price movements? Sometimes it’s just

so easy:

Is there such a thing as a “buy Goldman Sachs, sell Bear Stearns”

trade? If so, it’s happening this morning. Shares of Goldman Sachs were

up 2.2% in premarket action after the company reported another quarter of

printing money, as net income rose 79% despite the tough market conditions.

Bear Stearns was another matter, losing 1% after the company said net fell

61% on a massive 88% drop in fixed income revenue. Both issues were among

the top five traded this morning, according to Nasdaq.

But sometimes it’s

much harder:

Investors took a different tack when it came to Bear, sending its shares

down 0.16%, a slightly better performance than Goldman’s 0.96%. Analysts reasoned

that investors, who in recent weeks had questioned whether Bear could weather

the markets’ turmoil, now believe the firm is a survivor because its book

value, a widely watched measure of a firm’s net worth, has held up despite

its recent woes.

If that’s the case, Bear’s shares looked cheap and offered more opportunity

for improvement than Goldman. In recent weeks, for example, investors drove

Bear’s share price down to a level that was almost equal to its book value

per share, a measure of a firm’s net worth. The lower that ratio goes, the

cheaper, a stock becomes, signaling trouble. Goldman, on the other hand, is

trading at a multiple of about 2.3 times book value, according to Credit Suisse

estimates. Bear’s price-to-book multiple is at 1.2 times.

"The market looks and says can Goldman sustain a 32% return on equity,

whereas Bear is at a 5% return," said Brad Hintz, an analyst with Sanford

C. Bernstein & Co.

It’s almost a spectator sport, really: watching analysts and journalists tie

themselves in knots trying to explain why the company with spectacular earnings

underperformed the company with atrocious earnings. Maybe it was just one big

squeeze on people playing the “buy Goldman Sachs, sell Bear Stearns”


Of course, there’s absolutely no reason why a 4pm share-price snapshot should

give the best possible indication of how the market reacted to the two brokerages’

earnings news. Why not use the pre-market trading instead? Or wait a few more

days to see how things shake out? I’m hoping that as journalism moves away from

daily newspaper deadlines and towards a web-based, real-time operation, these

kinds of stories, reporting on share price movements between one day and the

next, will become increasingly rare. They certainly add precious little value.

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