The Stock That Blows Goldman Sachs Out of the Water

Love Goldman Sachs (NYSE: GS  ) or hate them, you have to grudgingly respect them.

When foreigners are asked to name an American college, they answer "Harvard." Baseball team? "Yankees." And a Wall Street firm? "Goldman Sachs."

Yes, it's been involved in more than its fair share of controversies and government investigations recently. But part of the reason for the unwanted attention is the notoriety it's gained as Wall Street's preeminent big dog.

If you doubt this dominance, let me pose one question: Even assuming no shadiness, would you want to be on the other side of a trade with Goldman Sachs?

Me neither.

That being said, there's a company out there that I'd rather invest in. Truth be told, there are many, but this one is special. It shares a lot of Goldman Sachs' strengths, without any of its weaknesses. Think of it as a Goldman Sachs upgrade.

Why Goldman rocks
Before I tell you about that company, let's review what makes Goldman Sachs so special. It breaks down to three factors. Goldman:

  • Attracts the best talent
  • Incentivizes that talent
  • Fosters its best-in-class aura

Now, you may argue these factors aren't unique to Goldman. I myself can quickly think of three companies in three different industries that could claim Goldman's advantages. Animators and creative types flock to Disney (NYSE: DIS  ) , wannabe managers love General Electric (NYSE: GE  ) and its world-class training program, and programmers who aren't launching their own garage start-up search Microsoft's (Nasdaq: MSFT  ) job listings. Each of these three companies benefit from the same virtuous cycle of talent begetting reputation begetting talent. It's a great competitive advantage.

But Goldman has an added advantage that they don't -- it operates in an industry that allows its employees to "eat what they kill." And it's the biggest predator in the jungle.

Put the next few numbers on a billboard, and see how much talent you can attract. According to the Medical Group Management Association, the typical primary-care physician makes $186,000 a year. Doctors who specialize make $340,000. The average Goldman Sachs employee (factoring in kids right out of college, assistants, and any support staff) made more than $450,000 in 2009!

Why Goldman is dangerous
This virtuous cycle of talent begetting aura begetting more talent is a goldmine for all best-in-class firms. But unlike Disney, GE, and Microsoft, Goldman Sachs gives that gold to its employees, not its shareholders.

As one former partner famously noted: "I determined many years ago that if you want to make money on Wall Street, you work there; you don't invest there. They just pay themselves too well."

Excessive compensation the only thing that worries me about Goldman -- and for that matter, its cohorts JPMorgan (NYSE: JPM  ) , Morgan Stanley, Bank of America, and Citigroup (NYSE: C  ) . The whole goldmine for these firms is at risk. Pick your poison:

  • Short-term focus
  • Significant leverage
  • Short-term borrowing
  • Heavy use of derivatives
  • Proprietary trading (i.e., making its own bets, not just for clients)

All of the above enhance the buzz when things are going well -- and it frequently does for the fortune-favored Goldman. But all add excessive risk that could cripple Goldman with little warning. And as Citigroup and Bank of America can attest, even extraordinary government aid may not save shareholders.

The company that blows Goldman out of the water
Enough with the backstory. Let's get to the happy ending. I promised you a better option for your money. Recall Goldman's recipe for success.

  • Attracts the best talent
  • Incentivizes that talent
  • Fosters its best-in-class aura

Like Goldman, the company I'm thinking of is a people-driven company that benefits from its best-in-class reputation. In fact, I've called Accenture (NYSE: ACN  ) the Goldman Sachs of consulting for quite some time.

However, Accenture doesn't motivate its people through on-the-verge-of-ridiculous compensation schemes that rely on serious risk-taking. Just like Goldman, it was structured as a partnership before it went public. The rank and file make great livings, but the big bucks at Accenture are reserved for those who "make partner."

Accenture pays its people less than a quarter of Goldman Sachs' $450,000+ per employee average. By incenting its employees primarily through the partner carrot, rather than huge annual bonuses, Accenture makes a killing.

And the spoils flow to shareholders. In Goldman's bubblicious glory years, it produced returns on equity of around 30%; in the last five years, Accenture has averaged returns on equity above 60%. That's with significantly more cash than debt the whole time.

I love businesses like Accenture: best-in-class companies that require very little capital, employ very little leverage, and deliver strong returns to shareholders. My colleagues at our Inside Value newsletter agree. They recommended Accenture to their members all the way back in 2005. It's beaten a flat market by more than 70% since then (and topped Goldman by more than 30%).

If you'd like to see the Inside Value team's entire write-up on Accenture, and all their other  recommendations, take a 30-day free trial. Click here to start.

Anand Chokkavelu knows Accenture firsthand, since he worked there before joining the Fool. He wouldn't have minded a six-figure bonus at the time. He owns shares of Accenture, Disney, Citigroup, and Microsoft. Accenture, Disney, and Microsoft are all Motley Fool Inside Valueselections. Disney is a Motley Fool Stock Advisor pick. Motley Fool Options has recommended a diagonal call position on Microsoft. The Motley Fool has a disclosure policy.


Read/Post Comments (21) | Recommend This Article (71)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 20, 2010, at 5:37 PM, dargus wrote:

    I think young programmers prefer Google to stodgy, old Microsoft.

  • Report this Comment On May 20, 2010, at 6:14 PM, plange01 wrote:

    goldman will be forced to close and the people behing this disgrace will be sent to jail

  • Report this Comment On May 20, 2010, at 6:36 PM, OPTIONNUT wrote:

    Was not ACN the old Goldman type firm of past that had a bunch of crooked Accountants that had to reorganize under a new name? Maybe GS can clean up its act and come back as Goodmen Succeed!

  • Report this Comment On May 20, 2010, at 6:41 PM, negrodamus wrote:

    What a terrible recommendation - no top notch talent ends up at Accenture....

  • Report this Comment On May 20, 2010, at 8:16 PM, peters46 wrote:

    I realize that penny-stock scam artists of the pump-and-dump variety are notorious for owning huge amounts of 'their' stock. But I still prefer when reading recommendations, that the individual not only believes in what he is saying but backs it up with his own money at risk. Thank you Anand. I would rather do my own due diligence on something like this rather than waste time on a penny-stock scam.

  • Report this Comment On May 20, 2010, at 9:16 PM, ragedmaximus wrote:

    looks like a mirror image of the spy on the chart so the stock will move with it

  • Report this Comment On May 20, 2010, at 9:26 PM, TMFBomb wrote:

    @dargus,

    Yup, Google is also a premier programmer-attracter.

    @OPINIONNUT,

    Accenture used to be Andersen Consulting...Andersen Consulting and Arthur Andersen (which is the accounting firm that went down for its role in the Enron debacle) were under the same umbrella before they split. They split well before the Enron mess and Andersen Consulting had to change its name as part of the divorce. So, yes, Accenture once had ties to Arthur Andersen, but no it had no role in Arthur Andersen's downfall.

    -Anand

  • Report this Comment On May 20, 2010, at 9:26 PM, penchy1 wrote:

    peters46

    Anand does back up his rec. He owns shares in ACN. Did you mean something else?

    Mark, who is a bit puzzled.

  • Report this Comment On May 20, 2010, at 9:40 PM, TMFBomb wrote:

    @penchymd,

    I was a little confused at first, too, but (correct me if I'm wrong peters46) I think he was saying:

    1) Pump and dumpers who buy penny stocks, recommend it, and then dump it when the price goes up are bad.

    2) He doesn't object to me owning stock in a company I'm highlighting (Accenture) because Accenture isn't a penny stock and it shows that I'm "eating my own cooking."

    -Anand

  • Report this Comment On May 20, 2010, at 9:58 PM, CAPTAINWACK wrote:

    Not worth the toilet paper it's written on.

  • Report this Comment On May 20, 2010, at 10:40 PM, law683 wrote:

    While I agree Accenture might be a great company for some of the reasons stated in the article above, the carrot dangle strategy could last only so long as there is a credential creep and people constantly striving to outdo themselves in a competitive, or even more so completely cutthroat job market. Making lots of eager rabbits with fewer carrots to share.

    Also, with continued cost shedding, external consultants are seen as an added cost layer to help a company's business. Many firms might just decide to develop their own talent from within or as always pitch the consultant to come to their side ... further causing atrophy to the workforce at Accenture. Service companies that can be mimicked or have factors bought out aren't the best for long term picks. Thats what keeps Goldman golden, no one can afford to buy their factors of service production i.e. employees.

  • Report this Comment On May 20, 2010, at 11:31 PM, SUPERMANSTOCKS wrote:

    I like DISNEY

  • Report this Comment On May 21, 2010, at 12:58 AM, 51dochudson wrote:

    I'm sure that this topic has been done to death; but I must ask. Is there any new news or discussion of the silver shorts that GS holds? I'm more than a bit concerned that the huge imbalance between short and long contracts that GS holds (and inherited from Bear Stearns) may take GS down or cause a monster of a short squeeze.

    Doc Hudson

  • Report this Comment On May 21, 2010, at 1:24 AM, kenrexb wrote:

    Goldman Sucks!!!

  • Report this Comment On May 21, 2010, at 4:27 AM, sharktrade wrote:

    GS : Cry Havoc ! Kill them all !

    They are are loosers now ...

    0 credibility and bad market practices

    GS practices make american citizens pay much

    tax ..

    @BlackSpart

  • Report this Comment On May 21, 2010, at 5:20 AM, thidmark wrote:

    Actually, Accenture WAS a penny stock a couple of weeks ago :)

  • Report this Comment On May 21, 2010, at 9:55 AM, TMFBomb wrote:

    @thidmark,

    Haha, I thought about referencing that in the article...I'm glad I was on vacation when my $40 stock dropped to a penny minute or two.

    -Anand

  • Report this Comment On May 21, 2010, at 12:52 PM, megalong wrote:

    "And the spoils flow to shareholders. In Goldman's bubblicious glory years, it produced returns on equity of around 30%; in the last five years, Accenture has averaged returns on equity above 60%. That's with significantly more cash than debt the whole time."

    Which helps reinforce the fact that seeking high ROE is pointless. As a Buffett-Graham value investor, I want more equity, not less. ROI is about a 1000x more useful.

  • Report this Comment On May 21, 2010, at 1:02 PM, moneyadvisors wrote:

    As one former partner famously noted: "I determined many years ago that if you want to make money on Wall Street, you work there; you don't invest there. They just pay themselves too well."

    Well said, it sums up the greedy nature of each and every wall street firm.

    Investing in wall street is very nowadays as compared to the past. Transparency in Corporate America has gone down the drain.

    Regards,

    Ann Julie

    Part of Money Management Directory (http://www.moneymanagementdir.com/)

  • Report this Comment On May 24, 2010, at 1:59 PM, mikecart1 wrote:

    [When foreigners are asked to name an American college, they answer "Harvard." Baseball team? "Yankees." And a Wall Street firm? "Goldman Sachs."]

    Beliefs by only Americans lol. Americans are surely naive.

  • Report this Comment On May 26, 2010, at 1:05 AM, hawkise wrote:

    Yes ACN was a spinoff from Anderson

    and the apple as far as working with their consultants did not fall too far from the tree

    But they have a stragety of people leaving their firm to work at their clients and outsource their work back to Accenture.

    It works and reguardless if you like the company or not or if you believe as I don't their output is worth near what their clients pay they make money and so does their investors

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