In investment banking land, few companies receive more attention that Goldman Sachs. It is looked at as the true-blue investment bank that never wanted to straddle the investment-commercial line. A recent article in one of the most revered financial magazines claims that Goldman is "Built to Win." While the author makes a compelling argument, there are many dissenting opinions. Is Goldman Sachs the top industry pick? Here's what you need to know.
If you build it...
If one were to read the latest Barron's cover story, "Built to Win," about king of the investment banks, Goldman Sachs (NYSE: GS) , they might have trotted over to the closest Edward Jones to tell their broker to back up the truck. While the author does raise valid bullish arguments for the company, he seems to turn a blind eye to some of the trending issues that have investor sentiment somewhere in purgatory.
The article starts out with a quick recap of the financial crisis and how Goldman was the only big bank to remain "intact." Now, yes, Goldman was in far better position than its rivals, but it wasn't the only stable company. Wells Fargo (NYSE: WFC) , though not in the exact same business, came away relatively unscathed. And it wasn't because they were the smartest guys in the room with the most adept trades -- they weren't. It was because they weren't playing with fire (fire being complicated financial instruments), like Goldman and everybody else was. As recently as June of this year, well after the crisis ended, Goldman was subject to a credit downgrade from Moody's, along with its peers minus, you guessed it, Wells Fargo. So did Goldman really emerge the strongest of any bank from the financial crisis? -- Meh.
Not to nit-pick, but the author also mentions that no big bank trades at or above book value. I am not trying to attack the author, and I have certainly made my share of generalizations in articles -- but Wells Fargo actually trades at around 1.32 times its book value. So, yeah.
A portion of the Barron's analysis focuses on employee reduction and cost savings. The company has moved support-level facilities to lower-cost areas, savings them a bundle, and that is a completely legit point. But the slimming down isn't all that great. Recently, Goldman cut its two-year analyst program -- a right of passage for banking analysts going back many years. That analyst program was designed to weed out the weak and contributed to Goldman's world-class roster. The company said it became tired of its junior analysts jumping ship after a couple of years -- but will this really help? Part of the new initiative includes a lack of a bonus -- something most analysts are motivated by to begin with. With no bonus for these new guns, they are likely going to be looking elsewhere even quick than before. Two words here, guys: talent drain.
Another thing I don't quite agree with is the author's mention of "institutionalized paranoia" in the management teams at Goldman. CEO Lloyd Blankfein is known for being risk-averse, as mentioned in the article. The company does take measures to protect itself from its own traders -- a sign of said paranoia. But I think the real paranoia here takes place on the opposite side of the table -- from shareholders and customers of the bank.
Investors and basically everyone with a television may remember the CDO debacle a few years ago. The issue was that Goldman Sachs was selling CDOs right as we were diving off the housing cliff, and the whole economic cliff shortly thereafter. Oh -- not just selling them, but shorting them at the same time. So it kinda-sorta looked like Goldman knew where things were headed, but it continued to fuel the fire.
I know this isn't quite the same issue as investment banking risk management -- which Goldman is admittedly good at -- but as far as paranoia goes, these guys are the conspirators, not the theorists.
Built to last
Some here at the Fool strongly believe Goldman is undervalued given the performance of its assets. Earlier this year, Goldman's return on equity crossed back into double digits -- a sign to investors that its book value may rise, and thus its stock price. I don't think investors will lose money on Goldman -- it does trade a decent discount to its tangible book value, and its not in the trash can like some of its Wall Street friends.
The thing about investing is, though, we have options. And the rule of thumb typically is to choose the best option. Goldman is fine, but there are better banking stocks for your portfolio. Wells Fargo, for the conservative minded investor, is a nice long-term hold with a decent dividend. It pays nearly a 3% yield compared to Bank of America's 0.4%.
For value seekers, however, I'm sticking with my call on Jefferies (NYSE: JEF) . Jefferies, similar to Goldman, trades at around 90% of its tangible book value. In contrast to Goldman's steadily declining revenues over the last couple of years, Jefferies has been rising in an equally steady fashion. The Barron's article touts Goldman's balance sheet as one of the best. It may be one of the best, but I think Jefferies is the best of any investment bank. 97% of the company's trading positions are Class I and II -- the most liquid (safest) classes.
To learn more about the most-talked-about bank out there, check out our in-depth company report on Bank of America. The report details Bank of America's prospects, including three reasons to buy and three reasons to sell. Just click here to get access.