To buy a stock, you need confidence in the earnings

Goldman Shares Sink to Lowest Price Since 1999 IPO (Update1)
By Christine Harper and Nick Baker

Nov. 19 (Bloomberg) -- Goldman Sachs Group Inc. closed at its lowest price since the firm first sold shares for $53 apiece to the public in 1999, as the profit outlook darkens for a company that set a record for Wall Street earnings last year.

The stock fell $6.85, or 11 percent, to $55.18 in New York Stock Exchange composite trading, giving the company a market value of $26 billion. The New York-based firm's value reached a high of $105 billion, or $248 per share, on Oct. 31, 2007.

Goldman, which converted from the biggest U.S. securities firm into a bank holding company in September, dropped along with other bank and brokerage stocks including Morgan Stanley and Citigroup Inc. today as investors questioned how the industry can recover from more than $700 billion of writedowns and credit losses as economic growth slows.

``Investors are walking away from financial companies until they have a better idea of the earnings power of the entire sector,'' said David Killian, a portfolio manager at Valley Forge Advisors LLC in King of Prussia, Pennsylvania, which manages $490 million including Goldman shares. ``In order to have confidence to buy a stock you need confidence in the earnings.''
Morgan Stanley, which was the second-biggest U.S. securities firm before becoming a bank holding company alongside Goldman, slid $1.78 today, or 15 percent, to $10.25. Citigroup, the second-biggest U.S. bank by assets, dropped $1.96, or 23 percent, to $6.40. All three companies are based in New York.

Profits Dwindle

Goldman surpassed rivals including Merrill Lynch & Co. and Morgan Stanley since going public in May 1999 to become the largest U.S. securities firm by market value and the most profitable in Wall Street history. On their first day of trading in 1999, Goldman's shares climbed 33 percent to $70.375.

Last year, the company became one of about a dozen in the U.S. with a stock price above $200. This year, profits are down 47 percent in the first nine months and some analysts expect the firm to report its first quarterly loss as a public company.

Morgan Stanley's profit has dropped 41 percent so far this year, while Citigroup has reported four consecutive quarterly losses. Goldman and Morgan Stanley each received $10 billion from the U.S. government last month as part of a rescue plan for the financial industry; Citigroup got $25 billion. In all, nine banks received capital injections.

Investors are concerned that return on equity, a measure of how effectively shareholder money is invested, will shrink because the banks are reducing their leverage, or ratio of assets to equity, to cut their reliance on debt-funding.

``A lot of the selling is questioning the business models of these big banks and investment banks,'' said Noman Ali, a money manager at MFC Global Investment Management in Toronto, which oversees $20 billion of U.S. stocks. ``If you don't know what the business model is going to be like going forward, and clearly it's not going to be levered 40 to one, the days of 30 percent ROE are going to be gone.''

To contact the reporters on this story: Christine Harper in New York at charper@bloomberg.net; Nick Baker in New York at nbaker7@bloomberg.net. Last Updated: November 19, 2008 17:10 EST

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