Whenever the stock market launches a strong advance, as it is doing these days, the major investment banks normally lead the upward parade.

Sure enough, shares of Goldman Sachs (GS) have shown fresh vigor as the market, buoyed by a strengthening economic recovery, has resurged. Goldman's stock has climbed to $115 a share, up from $104 in mid-January 2012. That's way up from its 52-week low of $69 on Feb. 16, 2011.

 

Impressed? Don't be. Things aren't "normal" at Goldman these days. The rally has been  fueled in part by relief over the fact that Goldman's fourth-quarter results were better than expected. But those results were largely driven by cost controls and revenues holding up a bit. Many Goldman watchers on Wall Street remain skeptical.

Strong headwinds -- including legal challenges, the impact of the Volcker Rule, and the persistent financial mess in Europe -- could easily derail the stock. Moreover, Goldman's reputation has been tarnished by the Congressional hearings into its trading activities. This has turned off a lot of investors.

 

"We remain cautious regarding the 2012 top-line outlook and see limited scope for upgrades," says Fiona Swaffield, who follows Goldman at RBC Capital Markets. She rates Goldman as "underperform" -- which to some is equivalent to a "sell" recommendation -- as she sees the stock sliding over the next 12 months, to $102. The low price target is based on "our expectations of relatively constrained returns"  due to regulatory issues and a difficult operating environment, says the analyst.

 

The fourth-quarter results weren't enough to convince her to increase her earnings projections. For 2012, she expects earnings of $10.68 a share, up from 2011's $4.51. But don't let that raise your hopes, since Goldman earned $13.18 in 2010, much higher than the 2012 estimate. The implication of the Volcker Rule, which would tighten regulations on market-making trading activities by investment banks, remains a big question for Goldman's revenues and earnings, says Swaffield.

 

Goldman's strong capital position and global reach are big positives, it's true. However, the big worry is how much the bank will suffer given the challenges it faces. Results at Goldman "will be tempered by macroeconomic headwinds that may subdue client activity levels, as well as by the potential charges stemming from lawsuits and government agency investigations," says Kenneth Leon, analyst at S&P Capital IQ. What will possibly help Goldman offset some of the downside risks from further potential legal developments are the bank's strong franchise and latent earnings power.

 

However, Leon expects Goldman will be busy attending to "client execution services," asset management, and expansion in developing countries. And it has lots of work to do to enhance its damaged image. Recently, it was reported by the New York Times that Goldman is scouting for a good PR person to help do just that -- salvage the investment bank's good name.

 

Leon rates the stock as a "hold" or neutral, noting that the 26% revenue decline in 2011 tied to global macro-economic concerns has affected clients' risk tolerance and demand for trading, underwriting, and advisory services. He rates the stock as a "hold," as he also expects the stock to drop lower, to $110 over the next 12 months.

 

Chris Allen of Evercore Partners has an even lower price target: $100 a share. The still pending government regulations could have a greater impact than is currently expected, says Allen.

 

So for investors who think the relatively depressed financial stocks are the way to go in the market's current rally, there are good choices in the group that would be fine investments. But Goldman Sachs isn't one of them.



Gene Marcial wrote the column “Inside Wall Street” for Business Week for 28 years and now writes for MSN Money’s Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.