A big-bath quarter or a big bad quarter? Here's why you should know the difference between the two...
We’re excited to share with you another important insight about investing. Every Wednesday, we talk about these topics because our aim is to help you improve your financial decision-making and achieve financial stability in the long run. Today, let’s focus on hidden opportunities behind a bad quarter. Read on to learn more about this subject matter.
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A big-bath quarter or a big bad quarter? Here's why you should know the difference between the two... Goldman Sachs (GS) was expecting an ugly quarter in 2023… and guess what? That’s exactly what it got! According to an August 2023 coaching comment from Rob Spivey, Director of Research at Valens Research, the financial-services giant missed earnings estimates in its Q2 2023 report, posting earnings per share of USD 3.08 versus the expected USD 3.18. Here’s the thing: GS CEO David Solomon publicly warned investors. In June 2023, he indicated the bank would take impairments on its real estate loans and investments. Even GS President John Waldron said equities and fixed-income trading volumes would fall by 25%. As expected, the outcome was far from pretty, with the company’s net income plummeting by two-thirds compared to the prior year. GS’ fintech business GreenSky was largely responsible for this poor performance. However, these ugly results actually benefited the global bank and set up a big future opportunity for investors…
The Hidden Opportunity in an “Earnings Miss” According to Spivey, the first step in bouncing back is admitting defeat. For instance: When GS first entered the consumer-banking space in 2016, it turned some heads. The company thought it could leverage its technology and risk-management strengths to gain a market advantage. So, it launched the Marcus mobile banking app in 2016 and acquired GreenSky in 2022. Investors remained skeptical about these moves, given GS’ longstanding success in commercial banking. Over time, the consumer-banking business dragged down company earnings. The good news? GS was willing to admit defeat! That meant GS was gearing up for a “big bath”—when management anticipates disappointing results and opts to make the quarter look as bad as possible. Ironically, that strategy also sets the stage for improved future earnings. In other words, if that specific quarter for the company hit rock bottom, GS would find it easier to crush those new, low expectations in future quarters. BUT! According to Spivey, the market isn’t giving GS enough credit for this crafty business strategy. One poor quarter won’t immediately and necessarily erase future success. After all, some investors can tell the difference between a big-bath quarter and a single bad quarter. Companies are quite intentional AND strategic in terms of big-bath accounting practices, especially when they have a chance to rebound quickly. That’s certainly the case for a world-class bank like GS, with its renewed focus on earnings targets and shareholder value. … and what does this mean for investors like you? If you look beyond the surface of this one bad quarter, you have a chance to profit from GS’ recovery right when management starts turning the business around. Hope you’ve found this week’s insights interesting and helpful. Netflix entered 2024 as the leader in the battle for eyeballs and ad dollars despite facing stiff competition from rivals like Disney and Warner Bros. Entertainment. Learn more about how you can navigate tough markets by investing in optionality in next week’s article! |
