Despite the ongoing credit crisis and market volatility, an analyst on Tuesday initiated coverage of Goldman Sachs Group Inc. and Morgan Stanley with "buy" ratings.
Sterne Agee analyst Ada Lee said Goldman Sachs' share price has been hit too hard, even though it is likely to report its worst-ever fiscal quarter for the period ending Nov. 30. Ms. Lee estimates Goldman Sachs will lose $1.68 per share during the quarter.
Analysts polled by Thomson Reuters, on average, forecast a loss of 28 cents per share for the quarter.
In a research note, Ms. Lee said Goldman Sachs has reduced the risk of a liquidity squeeze since competitor Lehman Brothers Holdings Inc. filed for bankruptcy protection in September. Since that time, Goldman has received an investment from Warren Buffett, tapped the government's $700 billion bank relief program and gained wider and permanent access to Federal Reserve financing by becoming a bank holding company.
Goldman's current stock price "reflects an unrealistically high probability of failure in light of the fresh capital raised from deep pockets and government funding programs," Ms. Lee wrote in the note.
Ms. Lee set a 12-month price target of $80.
In the near term, Ms. Lee said losses on principal investments will likely lead to the fourth-quarter loss because of the sharp declines in equity markets since the beginning of September.
For Morgan Stanley, Ms. Lee said in a separate note that it has embraced the change to a bank holding company — which it made at the same time as Goldman Sachs. Morgan Stanley, more so than Goldman, is using the change in its structure to alter its business model and is aggressively moving to grow its deposit base.
A bank holding company is the traditional structure most commercial banks take, and allows for large deposit bases, which provide a steady, stable form of financing for operations.
Morgan Stanley is likely to continue to push to increase its deposit base, which will help reduce its leverage, Ms. Lee wrote in the note.
Like Goldman Sachs, Ms. Lee said Morgan Stanley's current price places too high an expectation for failure. She set a 12-month price target for Morgan Stanley of $21.
Morgan Stanley shares advanced 6.7% Tuesday to close at $14.27.
Goldman Sachs shares rose 6.5% to close at $71.78
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