Tuesday, October 6, 2009

That Goldman Sachs (big) bank upgrade (GS; WFC)

From FT Alphaville:

It might seem counter intuitive, but according to Goldman Sachs, Wells Fargo is now the bank to own.

The Banking Holding Co. (née Investment Bank) upgraded the biggest US banks, including Wells, on Monday citing:

Big banks to further outperform regionals; reiterate CL-Buy on JPMorgan Chase and Bank of America: We estimate big banks have increased normalized earnings 39% this cycle mostly via long-term accretive deals (Wells/Wachovia, PNC/National City, JPMorgan/WaMu). Regionals normalized earnings have declined 36%. Regionals are partly cyclical given a bigger hit from zero percent rates and high NPAs, however our work suggests this is a small part of the overall change (Exhibit 1). In addition to becoming more positive on select names we continue to favor JPMorgan Chase and Bank of America given changes in earnings power and stock value this cycle which suggest upside reward as returns normalize (Exhibit 2).

And on Wells Fargo specifically:

Upgrade Wells Fargo to Buy: Wells is the big winner this cycle on change in tangible assets per share, up 70% from 2Q07 to 2Q09. The reason is simple: Wells bought Wachovia at a depressed price....MORE

A contrary view of the banks from Yahoo Finance's Tech Ticker via naked capitalism:

"Astounded" by Goldman's Upgrade: Banks "Heading Into the Storm," Whalen Says

...What strikes Whalen as more curious is Goldman's call on the big banks. Citing a positive outlook on earnings, Goldman analysts raised the outlook on banks from neutral to "attractive" this morning. They also upgraded Wells Fargo to "buy" from "neutral", Comerica to "neutral" from "sell", and added Capital One to their "conviction buy" list.

Whalen is "astounded" Goldman would make such a move "when the banking industry is heading into the storm." Contrary to the Goldman call, Whalen says the earnings outlook will get worse over the next two quarters, culminating in a bloodbath in the fourth quarter. Part of the problem for Wells Fargo, according to Whalen, is the bank still has plenty of write-downs to come associated with the Wachovia merger, as detailed here....

From Michael Panzer at The Big Picture comes a graphic on how behind the curve Golman's public calls on the sector have been:

Goldman Sachs: The “Smart” Money?!

...Unfortunately, Goldman’s relative lack of enthusiasm for large bank shares — after all, they were neutral — meant that those who took their advice to heart likely missed the subsequent double-digit percentage rally in the sector.

In sum, while markets cheered today’s news that Goldman Sachs — who many consider to be the “smart money” — was upgrading the large banks, based on their track record so far this year, shouldn’t investors have been selling those shares — and the overall market — instead?