GS Finance’s $1.75 million autocalls on basket tap into high-growth stocks for income play

By Emma Trincal

New York, Sept. 29 – GS Finance Corp.’s $1.75 million of 0% autocallable basket-linked notes due Sept. 28, 2028 provide double-digit yield for income-seekers through the use of an equally weighted basket of high-growth, volatile stocks.

The basket consists of the stocks of Advanced Micro Devices, Inc., Microsoft Corp., Netflix, Inc., Nvidia Corp. and Tesla, Inc., each with a 20% weight, according to a 424B2 filing with the Securities and Exchange Commission.

The notes will be called automatically at par plus a 14.5% annualized call premium if the basket closes at or above its initial level on any annual valuation date.

If the basket return is zero or positive, the payout at maturity will be par plus the return.

Investors will receive par if the basket falls by up to 40% and be fully exposed to the decline of the basket if it falls by more than 40%.

Stock picking

Julian Rubinstein, chief executive officer of American Asset Management, was not fazed by the contents of the underlying basket, which includes some of the best-performers in the tech space but also highly valued and volatile names.

“I like the note. I don’t see a lot of risk,” he said.

One factor reducing the risk was the potential for four early redemptions each year during the first four years.

“You will get called,” he said.

Unlike many advisers, Rubinstein does not just stick to indexes when selecting income notes.

“I usually pick worst-of autocalls on stocks. That’s how you get your premium,” he said.

“Indices are far safer, but you don’t get a lot of income.”

Rubinstein manages his risk through a careful stock selection process.

“I typically pick low-beta securities like American Express, Microsoft, Walmart, Home Depot or Nike.

“I am selective. I use the worst-of to get the premium. But I avoid high-beta names like Tesla,” he said.

Tesla in his view was the most overvalued stock in the basket and the one he would be the most concerned about.

Hedging the risk

The mega-cap basket components were not “low-beta” stocks in this offering, he noted. What restricted the risk was not the picks but the basket.

“It’s a weighted basket, not a worst-of. So, my exposure is diversified. I can take a little bit more risk with the components than I usually do,” he said.

Another important risk-reducing factor was the barrier level.

Looking at five-year rolling periods and going back to 2015, the 60% barrier was never breached, he said using data for each of the five stocks applying the equal weightings.

The call event was extremely likely as well.

“The average life for a call above 100% of initial price was five months,” he said.

Unlikely participation

Even the weak spot of the structure, which is what happens at maturity if the notes never get called, was not a real drawback for this adviser.

The payout scenario at maturity is indeed somewhat different from most “snowball” structures, he noted.

Investors in this note get at maturity 100% of the upside instead of the cumulative premium, which would have been 72.5%.

Reaching maturity would mean that the basket was negative on each of the four annual observation dates.

In such scenario, investors would only have the last year to yield some growth in order to make the uncapped participation worthwhile.

For Rubinstein, the point was moot.

“I’m OK with the scenario at maturity because I’m going to get called anyway,” he said.

“The chances to get to maturity are slim. But you still have to consider the possibility; and so, I guess you’re stuck if it happens.”

One way to alleviate such risk would be a change in the observation frequency.

“I like this note a lot. But I probably would prefer a quarterly payment and get my income with memory,” he said.

AI momentum

Another financial adviser also believed the call was extremely likely.

“Not sure when but at some point, you will be called. If you don’t, your chances of losses will increase tremendously,” this adviser said.

While the basket led to less risk than a worst-of payout, its components were still highly volatile.

“Something happens in the AI space and these stocks are going to plummet.

“If you don’t get called, that’s not a good thing. You don’t want to hold it until maturity. But I really don’t think you’ll get that far,” the adviser said.

Income bet

The notes were designed for investors seeking yield.

“The 14.5% premium is reasonable except if you chase the returns of those big winners,” he said.

“But that’s not the reason you do this note. You do this for income. I would look elsewhere if I wanted the returns.”

Investors looking to “chase the returns” of the basket components should buy a technology ETF or the Nasdaq instead, he said.

“It’s not a growth story despite the big tech stocks in the basket and the unlimited upside. It’s an income play.”

However, this adviser would stay away from the notes even for the purpose of seeking income.

“I think there are better choices out there if you need income,” he said.

“I think a worst of two or three U.S. equity indices is a much better choice.”

The notes are guaranteed by Goldman Sachs Group, Inc.

Goldman Sachs & Co. LLC is the agent.

The notes settled on Sept. 26.

The Cusip number is 40057WBH9.

The fee is 4.125%.

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