With nothing more than a passing glance, an investor could conclude one stock is as good of a pick as the other. Both are highly diversified, monster-sized financial services companies. And both have been around for eons and will likely remain intact forever, if for no other reason than their pedigrees.
But if you're mulling a choice between Goldman Sachs (GS 0.03%) and Wells Fargo (WFC 0.23%) right now, you should know that the two organizations are likely in for very different foreseeable futures.
Image source: Getty Images.
Comparing Wells Fargo and Goldman Sachs
Neither name needs much of an introduction. Although Goldman Sachs isn't quite the royalty it was in Wall Street's growth heyday back in the 1990s and early 2000s, it's still a name that turns heads. Wells Fargo is, of course, the mega-bank that embarrassed itself back in 2016 by opening a couple of million unauthorized accounts in actual customers' names.
While Wells Fargo paid a hefty price for its misdeeds, the market seems to have forgiven and forgotten. Wells Fargo shares are up more than 17% for the past 12 months, while Goldman Sachs' stock is down about 3% over the same timeframe. That's not an insignificant difference, given that the two organizations are closely related.
But past performance is no guarantee of future results, as the old cliche goes. The two companies' different revenue mixes are poised to produce distinctly different results going forward.
As the graphic below shows, Wells Fargo's got its finger in a lot of different pies, so to speak, but is predominantly a consumer-facing company. The bulk of its top line comes from offering checking accounts and making loans to people.
Data source: Wells Fargo. Chart by author.
When looking at Goldman Sachs' sales by operating unit (the chart below), we see that it manages a handful of different businesses (its Global Markets arm handles specialty stuff like derivatives and currency-related matters). Note what's conspicuously missing, though. Goldman Sachs doesn't focus nearly as much attention on consumer-facing banking services. The majority of its revenue comes from serving the corporate world with investment banking and ancillary services.
Data source: Goldman Sachs. Chart by author.
This significant distinction is what actually favors Goldman over Wells Fargo for investors.
The whole story
At first glance, not every investor will agree with that assessment. And to be fair, there are no risk-free absolutes when it comes to picking stocks. Consider the facts at the moment.
Interest rates are on the rise. Indeed, the Fed's (admittedly adjustable) plans are to impose around 10 quarter-point rate hikes between now and the end of 2024. The average interest rate on a 30-year mortgage loan has already moved above 5% for the first time since 2011, and last week's jump was the fastest increase seen since 2011. In that higher interest rates translate into higher profit margins for lenders, this looks like a boon for banks like Wells Fargo.
At the same time, the investment banking industry that typically makes Goldman Sachs a profit-generating machine is drying up. EY (formerly Ernst & Young) notes that the first quarter's initial public offering (IPO) volume fell 37% year over year, with total raised proceeds being down 51% versus the first quarter of 2021. Presumably, corporations aren't tapping Goldman for its other corporate-related services either.
It would seem Goldman is in trouble and Wells Fargo is on the rise. But what if we're looking at things all wrong?
The fact is, the lending market was already deteriorating even before last week's sharp rise in interest rates. The Mortgage Bankers Association says last week's mortgage applications fell 41% from the year-ago number, with higher interest rates discouraging would-be borrowers.
Perhaps even more problematic, delinquencies are finally on the rise again. Mortgage and real estate market research outfit Black Knight reports that for the first time in nine months, February's mortgage delinquencies grew. Credit card delinquencies edged a little higher in February too, and though it's not been well-touted, delinquencies on car loans grew for a ninth-straight month in February, according to data compiled by Manheim Consulting. Some lending industry observers fear these may be signs of brewing trouble for the consumer lending business that makes up a huge chunk of Well Fargo's top line.
Suddenly, making loans doesn't feel like a great business to be in.
At the same time, while the investment banking business was lackluster in the first quarter, there's more to the story. Part of that story is that 2021 was a record-breaking year for IPOs, as measured by the total number of offerings and the total amount of funds raised. In fact, EY notes that the final quarter of last year was the most active fourth quarter for IPOs since 2007, not leaving a whole lot of business to be done during the first quarter of this year. Also, bear in mind that 2021's IPO market was exceedingly robust because the COVID-19 pandemic crimped the public offering market in 2020.
The reality is that the need for fresh corporate capital and investors' desire for new opportunities are never going away. They're just going through the relatively slow part of a never-ending cycle that ultimately makes Goldman Sachs a reliable long-term holding.
Always think of the bigger picture
None of this is to suggest Wells Fargo is an un-ownable financial name, nor is it to guarantee Goldman Sachs is destined to outperform. There are always unknowns that can impact a stock's price in the short term.
Given the number and nature of the knowns largely being overlooked right now, however, investors seem to be betting on the wrong horse. Goldman's stock pullback is a buying opportunity, while Wells Fargo is starting to inch its way into a future that's much fuzzier than most people anticipated it would be at this point.
