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Every week, I single out a stock that has no place in your portfolio. I'll give you my reasons, but don't think I'm all doom and gloom. To make up for my pessimism, I'll come right back with three stocks that I believe will generate better returns than the stock I'm throwing away.
Sounds like a fair trade, right? And speaking of fair trades, this week's stinky stock could have used a few more of them. Who gets tossed out this week? Come on down, Goldman Sachs (NYSE: GS ) .
All that glitters isn't Goldman
Goldman Sachs is apparently feeling so confident that it wants to pay back the $10 billion in TARP funds it accepted in October. If the reports are true, Goldman could return the money within the next few weeks.
It's easy to understand why the investment banker is in a rush to free itself from the TARP trap. Goldman sees how legislators wanted to tax AIG (NYSE: AIG ) executives out of their retention bonuses. It's nervously watched the public meddle in everything from corporate jet orders to office makeovers. In short, Goldman doesn't want to operate under that kind of scrutiny.
I guess that makes Goldman Sachs the dimwitted heroine in a slasher flick, thinking that it can finally relax because it believes that the villain has been vanquished -- even if all its friends got hacked to pieces in the process. Sorry, Goldman, but your story's not over yet. The public's still out there, and it's still watching you.
Giving back the TARP funds won't earn Goldman Sachs a free pass from taxpayers. After all, it still got nearly $13 billion of the $170 billion in taxpayer money funneled to AIG to pay off the insurers' losing bets. How much of that money would Goldman have seen if Uncle Sam hadn't stepped in to clean up AIG's mess? In short, even without the TARP money, Goldman's still holding a chunk of taxpayer change, which should keep it squarely in the public's crosshairs.
Admittedly, none of that seems to scare the market these days. Goldman Sachs has been on a tear, soaring 117% since it bottomed out in November. The company's competitive climate has definitely improved, with Lehman Brothers six feet under and rivals like Merrill Lynch and Bear Stearns swallowed up by bigger fish.
That would all be great news -- if the future held more of the unregulated trading and volume of underwriting activity that lent the industry's past such a rosy glow. But it doesn't. Not even close. Goldman Sachs may be a survivor, but it'll be vying for a bigger slice of a vastly smaller pie.
And now, the good news
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting the heave-ho. Let's go over the three fill-ins.
- Berkshire Hathaway (NYSE: BRK-A ) (NYSE: BRK-B )
If you're going to buy into Goldman Sachs, it would be great to do so like Warren Buffett did. Berkshire was able to invest $5 billion in Goldman Sachs in exchange for "perpetual" preferred stock that yields a healthy 10%. The real gravy here is that Berkshire also received warrants to buy $5 billion worth of Goldman Sachs at $115. That's pretty much where the stock is now, giving the investment major upside if I'm wrong about Goldman Sachs' potential to appreciate over the next few years. Even if I'm right, and Goldman's headed for a fall, Buffett will still be there to collect 10% annually. Goldman Sachs isn't going away, even if it doesn't go higher.
- Charles Schwab (Nasdaq: SCHW )
I'm warming up to any financial-services company that has resisted the siren song of TARP. Companies such as Schwab and Hudson City Bancorp (Nasdaq: HCBK ) will be able to capitalize on the tight scrutiny the rest of the industry will face. Analysts see earnings declining this year at Schwab, before bouncing back sharply in 2010. Then again, if the market turns the corner and trading activity remains brisk this year, Wall Street may have to revise its estimates higher.
- T. Rowe Price (Nasdaq: TROW )
Many of the stock investors who got slammed over the past few years -- or even those just starting out -- will be tempted to consider mutual funds, letting pros sweat out the daily gyrations. And rather than blindly signing up for costly full-service brokers with expense-laden funds, they're now armed with enough knowledge to pursue less expensive, high-performance investments -- T. Rowe Price's specialty. It certainly doesn't hurt that the company yields a healthy 3.55% right now. Like most fund companies, it's working on a lower total asset base year over year, but its respectable track record should help T. Rowe Price gain market share in the near term.
Do you like my substitutions? Would you rather stick it out with the tossed company? Are there other stocks I should look at in future editions of this column? Let me have it in the comment box below.
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