There's a lot about Goldman Sachs Group Inc. that looks like a value investor's dream: The company is absurdly profitable, it operates in a sector that is finding its feet after being decimated during the financial crisis, and the stock has been beaten up - badly.
Since the U.S. Securities and Exchange Commission announced that it was laying civil fraud charges against the financial firm, the shares have fallen about 15 per cent. The decline has wiped $15-billion (U.S.) from the company's market capitalization, implying that many investors fear big problems ahead.
Are investors overreacting? Probably.
Glenn Schorr, an analyst at UBS, recently framed the threat to Goldman Sachs this way: "At a minimum, these issues will be a distraction for senior management and at worst they could wind up hurting the firm's reputation, potentially costing Goldman business and also could lead to litigation costs."
So, if management is merely distracted for a little while, then Goldman Sachs looks like a terrific buying opportunity right now. Once investors realize that the damage to the company isn't severe, the shares should rebound.
A hurt reputation is a more serious issue because presumably Goldman's clients could take their business elsewhere. But even here it is hard to envision the company suffering through a prolonged slump.
Reputations are hurt all the time in the business world, but it's remarkable how resilient companies can be with the right approach. Toyota Motor Corp. is one of the more recent high-profile examples. Its sticky accelerators turned the brand - once the envy of the car-making industry - into a joke.
Toyota stock was hammered during the early stages of the crisis, falling about 22 per cent in the first month. However, despite lawsuits, fines, recalls and apologies, the shares (trading as American depositary receipts in New York) have since rebounded 8 per cent from their February low. Damaged reputations, it seems, don't last long.
But back to Goldman Sachs. Even without a grovelling apology or not-guilty verdict, there are at least two things that could lift its name out of the muck.
It is widely believed that Goldman Sachs won't be the only financial firm accused of impropriety, as regulators and plain old commentators look for other villains of the financial crisis. If Goldman's actions weren't out of line with others on Wall Street, or Bay Street for that matter, its infamy will fade.
And second, even with a damaged reputation, it is unlikely that Goldman Sachs' uncanny ability to spin money will take a prolonged hiatus, and profits have a habit of bringing investors back to a stock.
It might be easy to turn up your nose at ethical lapses. Walking away from a profit-making machine is a lot harder.
David Berman