Berkshire Hathaway made news in May when it sold most of its shares in investment bank Goldman Sachs (GS +0.31%). While Berkshire Chairman and CEO Warren Buffett didn't elaborate, the move was likely part of his efforts to de-risk the portfolio, as my colleague Matthew Frankel wrote about back on May 19. Goldman was not the only financial stock that Buffett dumped, but it was his biggest sell, as he dropped more than 10 million shares. Berkshire Hathaway still holds about 1.9 million shares, but it is no longer the company's largest financial holding.
Since closing at a 52-week low of $133 per share on March 23, Goldman has roared back up to almost $215 per share as of Thursday. The stock is down about 7% on the year, and investors that held on through the dip reaped the rewards of that sizable snapback. But investing is about the long term, so let's take a look at Goldman's prospects.
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Changing the white shoes for sneakers
Even before the market turned down in March, Goldman Sachs had been transitioning to diversify its products and services, as well as its revenue stream. The "white-shoe" firm -- so called because of its long-term prestige -- has long derived much of its revenue from its asset management and investment banking business, which thrive when markets and the economy are strong. Further, the capital markets business, through which the company conducts trades for clients, is somewhat cyclical in that it's tied to market volatility. The fourth and smallest arm of the business is consumer banking and wealth management.
This is the area where the company is looking to expand its presence. Specifically, the company is focusing on building up its transaction banking for corporate and institutional customers, consumer banking through its digital bank Marcus, and private wealth management. These are all more durable, resource-light businesses -- like a comfortable pair of Vans -- with stable earnings potential. The consumer and wealth management business saw a 21% revenue increase in the first quarter led by consumer banking, which posted a 39% revenue gain over the first quarter of 2019.
"In general, our new business initiatives are designed to target more durable revenues, greater capital efficiency, and an enhanced funding mix. In our framework for evaluating opportunities, we examine whether they address a client need, capitalize on one or more of our competitive advantages, and are adjacent to one of our market-leading businesses," Chairman and CEO David Solomon said in an April letter to shareholders.
Is there a merger in the cards?
Buffett may have dumped a lot of shares of the stock, but he is still holding nearly 2 million. That is probably because Goldman Sachs is in a period of transition. While it is still too reliant on more cyclical business lines, the company is heading in the right direction. The next few quarters will be tough on those traditional revenue streams as mergers and acquisitions have slowed -- and will continue to -- and asset management will be challenged by low interest rates. The consumer and wealth management business will continue to grow, particularly in this economic environment. The trading business, which accounts for 40% of revenue, should also provide a boost through this period of volatility. If I owned this stock, I would not trade it, as it's likely already been through the worst over the long term.
Also, there have been reports that Goldman Sachs is looking to supplement its banking business with the acquisition of a major bank. Wells Fargo, PNC Financial, and US Bancorp have all been mentioned as possible partners. Depending on the partner, this could be a great move that creates a diversified financial services behemoth like JPMorgan Chase.
Given that uncertainty, it may be best to watch and wait before buying, but that could be a game changer.
