Goldman Sachs Conviction Buy List Changes ~ market folly

Tuesday, May 12, 2009

Goldman Sachs Conviction Buy List Changes

With the market ramping up the past few months, Goldman Sachs has been quite busy editing their coveted Conviction Buy List. For those unaware, Goldman's Buy List is simply a list of the names they deem to be 'the best' at present. They also have a Conviction Sell List, which outlines stocks to be avoided at all costs. Just last week, we went through and updated the changes to their Conviction Buy List. And, here we are yet again with another round of some additions and a lot of subtractions.

Before we begin, do note that we don't necessarily place too much weight on individual analyst calls. As evidenced by the massive market decline of 2008, many analysts were behind the ball and were reactive rather than proactive. As such, we take it all with a grain of salt. That said, we also realize that many of these reports can move markets and influence opinion of various stocks, which is why we cover them. As we like to say, you have to "trade the perception, not the reality."

Conviction Buy List

Additions to the Buy List: International Game Technology (IGT), Bank of New York Mellon (BK), Teradyne (TER), Tenneco (TEN), Devon Energy (DVN), Owens Illinois (OI), and Lincoln National (LNC).

Stocks removed from the Buy List: Federal Mogul (FDML), Penn National Gaming (PENN), Chesapeake Energy (CHK), Northern Trust (NTRS), PMC Sierra (PMCS), Biiogen Idec (BIIB), Gap (GPS), L-3 Communications (LLL), Dollar Tree (DLTR), EOG Resources (EOG) and W. W. Grainger (GWW).

There are a lot of moves listed above, but let's check in on some of the more extravagant and bold calls. Goldman has practically doubled IGT's price target from $11 to $20, which is somewhat hard to stomach given the fact that they supply casinos and Vegas is in massive amounts of pain. Originally, Goldman had IGT listed as neutral, so they've really changed their stance on this one. Interestingly enough, they removed Penn National Gaming (PENN) from their Buy List at the same time. While we realize that each company in the gaming segment should be treated as an individual entity, we can't help but notice the interesting dynamic here. Goldman still lists PENN as a buy, but it is no longer on their coveted list, most likely due to the recent earnings release.

In typical Wall Street fashion, we see that as the financials all rally back from the abyss, Goldman adds Bank of New York Mellon (BK) to their Conviction List. "Oh, everything's fine and dandy again, buy buy buy!" Where was this upgrade back on the lows? This is a textbook example of being reactionary rather than proactive. In fairness to them, we're being pretty harsh here because BK is only up 10% over the past 3 months and is considered to be in slightly better shape than most other financials out there. BK has surfaced in our coverage before when we looked at the gap between tangible common equity and tier 1 capital in some financials. While BK was added to their Conviction List, we curiously see Northern Trust (NTRS) removed from the Conviction List. Both of these financial institutions are perceived to be less risky and more stable than most of the other volatile financials out there. As such, it's interesting to note that Goldman currently favors BK over NTRS.

We also noted that Chesapeake Energy (CHK) has also been removed from the Conviction List, but still retains a buy rating from Goldman. You'll remember that last week we touched on the highest paid CEOs of 2008 and Aubrey McClendon of CHK controversially topped the list.

Also, we see that Biogen Idec (BIIB) has been removed from the Conviction Buy List. We highlight this because longer-term readers of ours will know that we've documented a large hedge fund presence in this name. Hedge fund Shumway Capital Partners had BIIB as their 5th largest holding in the fourth quarter of 2008. Additionally, rabblerouser and well-known activist Carl Icahn has a sizable position in BIIB, as he looks to shake things up there. Goldman still remains a regular buy rating on the name.

In another sizable call from Goldman, they have upgraded Tenneco (TEN) from neutral to buy and have added it to the Conviction List. Their price target on the name is now $10, way up from their previous $2.10 price target. Tenneco designs automotive emission controls and clearly Goldman sees a lot of upside in this name. In fact, their upgrade alone pretty much sent the stock up 10%.

In one last big call, we also see Goldman's big change of heart on shares of Lincoln National (LNC) as they upgrade it from sell all the way up to buy and add it to their Conviction List. This move is very perplexing, seeing how shares of LNC are already up over 80% in the last month. Again, we ask, where was this upgrade a month ago?

That about covers the major moves this time around, as we saw a lot of names removed from the Conviction Buy List. Make sure you also check out our update from last week where we outlined some of the other recent changes to Goldman's Conviction List. We'll continue to track the major movements on Goldman's coveted lists.

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