Motley Fool: All the right moves

Investment banking giant Goldman Sachs (NYSE: GS) has a reputation for finding ways to make money in any market environment, no matter how challenging. In the fourth quarter of 2018 – a period when financial markets were experiencing volatility to a degree investors hadn’t seen in a decade – Goldman managed to bring in half a billion dollars more in revenue than most had expected, and profits topped the consensus forecast by more than a third.

One of the catalysts fueling Goldman’s strong performance has been its young but rapidly expanding consumer-banking division, which includes the highly successful Marcus platform for personal loans and high-yield savings accounts. In fact, Goldman’s revenue from debt securities and loans grew by 43 percent year over year in 2018, and the Marcus growth was a big reason.

Goldman plans to expand its consumer offerings. A wealth-management product for everyday Americans was announced in late 2018, and it could leverage Goldman’s brand power to capture a market it has historically not served. Furthermore, Goldman is reportedly partnering with Apple on a co-branded credit card product. If that’s successful, it could take Goldman’s credit card business from zero to billions in a relatively short time.

Between consistent excellence in the investment banking division and newfound promise in consumer banking, the Wall Street giant should appeal to long-term investors.

Ask the Fool

Q: If I’m drawn to a young and growing company, what should I look into before investing in it? – T.S., Bradenton, Florida

A: First, make sure the company has competitive advantages. These might include a strong brand, a solid reputation, valuable patents or economies of scale.

Check out the financial statements it has filed with the Securities and Exchange Commission (SEC.gov/edgar.shtml). Its income statement should feature growing sales (sometimes called revenue) and income. On its balance sheet, figures for inventory or accounts receivable should not be growing faster than sales. Heavy or quickly growing debt are additional red flags.

Look at the company’s statement of cash flows to see how it’s generating cash. Ideally, most cash should come from ongoing operations – the making and selling of products or services – and not from issuing debt or stock or selling property.

Examine the company’s profit margins (gross, operating and net). Higher margins suggest that it has a strong brand or special technology it can charge more for. Ideally, profit margins should be growing over time – or at least not shrinking.

Finally, assess how attractive the price is; while a company may be terrific and promising, you don’t want to overpay for its shares. Comparing its price-to-earnings (P/E) ratio or price-to-sales ratio to its five-year average – which you can find at Morningstar.com – will give you a sense of how its valuation has been changing over time. (Enter the company’s ticker symbol and then click on the “Valuation” tab.)

You can learn much more about how to evaluate companies at Fool.com.

Q: How can I access my credit report? – F.R., Riverside, California

A: Visit AnnualCreditReport.com, where you can get free copies annually.

My dumbest investment

In 1966, just out of college, I bought 15 shares of a stock at $9.75 apiece (total investment: $146.25, less the trading commission). About three years later, I sold them at $127 per share for almost $2,000! When the stock fell back to $10 and was paying a $1 dividend, I remembered my positive experience and bought 1,000 shares. Soon thereafter, though, the company suspended its dividend and promptly fell to around $4, erasing much more than the phenomenal gain I’d made in my first three years of owning it.

Lesson learned: If you sell it, you sell it for a reason. If it falls a lot, it does so for a reason. Don’t get so enthralled with a stock that you don’t do your research and fail to be objective. – J.M., Tampa, Florida

The Fool responds: That’s a terrific initial gain, though clearly, buying into the stock again was a mistake.

You’re right that you needed to do your homework. One might assume that a stock that soared will keep soaring, but it doesn’t work that way.

A stock that has surged more than 1,000 percent in three years may well be overvalued and likely to pull back at least a little for a while.

It’s important to have a good grasp of a company’s health, performance and risks – and to keep up with its progress – if you’re going to invest your hard-earned dollars in it.