Goldman Sachs' equity-linked trigger notes tied to Apple stock offer good risk/return profile

By Emma Trincal

New York, Nov. 16 - Goldman Sachs Group, Inc.'s 0% equity-linked trigger notes due Dec. 5, 2012 linked to the common stock of Apple Inc. offer an attractive risk-adjusted return, according to sources who said that the odds of the downside barrier being breached are slim given the innovative nature and strong fundamentals of the electronics franchise.

The upside offers potential annualized gains of between 11% and 25% even if the stock falls, as long as the decline is less than 20%.

"This upside is pretty attractive, especially coupled with a 20% downside protection," said Jim Delaney, portfolio manager at Market Strategies Management.

A trigger event occurs if the stock closes below 80% of its initial price on the determination date, which is expected to be Nov. 30, 2012, according to a 424B2 filing with the Securities and Exchange Commission.

If a trigger event occurs, the payout at maturity will be par plus the stock return. If a trigger event does not occur, the payout will be par plus the greater of a contingent minimum return of 11% and the stock return, subject to a maximum return of 25%.

Cap

"On the upside, you're good until the stock is up more than 25%," said Delaney.

"But even still. ... Say the stock is up 27%, you give up 2%, but you have that 20% protection on the downside.

"So basically you're in good shape as long as the stock doesn't fall by more than 20% in a year. And I don't think it's going to happen."

Delaney said that Apple has too many strong features to be at a high risk of hitting the downside barrier.

"It's a very popular company. There's a lot of innovation coming out of it. The earnings are good," he said.

Solid performance

From a stock performance standpoint, Delaney said that Apple has been a winner for a long period of time.

The shares have gained 363% over the past five years.

The stock was hit by stiff losses in 2008, with a 49% decline in that year's fourth quarter as well as a 37% drop during the first two months of 2008.

But the entire market collapsed at the time, he said.

"Apple has outperformed the market in general over the past few years. For Apple to lose 20%, the market would have to be down 50%, and I don't see that happening," he said.

The recent death of Apple co-founder Steve Jobs in early October should not push the stock 20% down, Delaney said.

"I know Jobs was the visionary, the genius. But his health had been suspect for a number of years. I think they had ample time to get prepared and take his vision to the next level," he said.

Apple's shares hit an all-time high nearly two weeks after Jobs' death amid the release of the new iPhone 4S.

Retail trade sales in October were up 7.3% above last year with the "electronics and store appliance" category jumping 3.7%, according to the U.S. Department of Commerce.

"Many analysts have credited the sales of the iPhone 4S for a good portion of the increase in electronics sales," said Delaney. "That's how much economic power this company has."

Wild cards

Robert Castellano, technology stock analyst and president of the Information Network, is more neutral on Apple due to uncertainty and macroeconomic developments.

But he said that he does not anticipate a 20% price decline a year from now.

"Normally, it shouldn't happen," he said.

"Over the past quarters, the only times Apple did very well was when they introduced a new product.

"So a lot of the price will depend on their capacity to remain very innovative."

Yet the company has faced some hurdles recently, he said.

"The 4S phone had problems with battery life, and people have turned relatively unenthusiastic for Apple," he said.

"It may change when they come out with iPad 3.

"From a technology standpoint, they should be OK with the iPhone 5, the iPad 3 and the new Apple TV.

"But there is so much going on with macroeconomic issues that it's not a guarantee.

"Every day when the sovereign debt problem is in the news, the market goes down.

"If this market gets worse, then of course the stock could fall too."

The notes (Cusip: 38143UG62) will price on Friday and settle Nov. 23.

Goldman Sachs & Co. is the underwriter with J.P. Morgan Securities LLC as dealer.

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