It’s a bear-bond market ladies and gentlemen; let’s find a good way to take advantage of it.
As usual, I like to present two different options in order to appeal to different risk tolerances and income preferences. Different strokes for different folks, right?
Has anyone else noticed this?
The head of market research for Goldman Sachs Group Inc (NYSE:GS) in Europe, Francesco Garzarelli, projects an even longer upward trend in the 10-year treasury note yields. But when you look deeper into the company he’s presenting from, you realize something. Goldman Sachs Group Inc (NYSE:GS)’s stock price has an insultingly obvious correlation with the 10-year treasury yield. It’s like Mr. Garzarelli is prodding us to invest in the company for which he’s reporting.
Why is this the case?
Goldman Sachs Group Inc (NYSE:GS)’s unique business model consists of investment banking, client services, investing and lending, and investment management. I may be grossly oversimplifying the company, but when big market moves like this occur, Goldman Sachs Group Inc (NYSE:GS) generates tons in institutional client services to move money around. Not to mention, given a better economic climate, Goldman Sachs Group Inc (NYSE:GS) saw a 12% spike in revenue from investment banking in the first quarter.
And even though higher interest rates might eventually drive down activity, Goldman Sachs Group Inc (NYSE:GS) seems to do well in a high interest rate environment. Their investing and lending segment is their second largest revenue stream and will certainly do better as interest rates rise and Goldman can charge higher spreads on interest.
A steadier (and much more boring) alternative
Wells Fargo & Co (NYSE:WFC) stock has done pretty well lately. The bank holding company, while still in finance, has a very different business model from Goldman Sachs. Wells Fargo has managed to out-preform Goldman Sachs’ stock. The company’s new business model has provided more steady money streams, illustrated here.
Source: Wells Fargo Investor Relations
Wells Fargo & Co (NYSE:WFC) has been moving towards a fee-based business model, which provides a completely different income to that of Goldman Sachs. This strategy, coupled with their limited downside risk, is the reason why they’ve out-preformed Goldman in previous years. Wells Fargo is swayed less easily by the moves in the market, and the company proves to be much more consistent than Goldman Sachs.
But as the economic climate changes, Wells Fargo’s steady revenue stream will stay what it is – steady – whereas rising interest rates, higher spreads, and more activity will significantly boost the earnings and profits of Goldman Sachs. More risk, more reward, of course.
For the risk-takers, Goldman Sachs provides a pretty good shot at generating solid capital gains in the quarters to come. On the flip side, Wells Fargo remains and will continue to be a strong investment.
Neck and Neck
Looking at the valuations of both companies, they’re relatively equal. Goldman Sachs is trading at a price equal to 11 times its earnings, whereas Wells Fargo is trading at 12. But what really emphasizes the two different strategies here is the disparity in their dividend income. Wells Fargo currently yields a 6.8% annual dividend, whereas Goldman Sachs only brings in 0.8%. Huge difference! But I believe Goldman Sachs also pulls in a more reliable opportunity for big capital gains in 2013, so it’s quite the trade-off. The beta ratios of both companies are nearly equal, hovering around 1.4.
With that being said, Wells Fargo doesn’t provide the same correlation with treasury yields that Goldman Sachs offers, so any predictions coming out of my crystal ball are much more opaque. In the pursuit for certainty though, I prefer Goldman Sachs Group Inc (NYSE:GS) as part of a more aggressive capital gains strategy.
This may be your last shot to lock in good dividend with Wells Fargo though, so make a decision, and make it quick!
The article The Goldman Gold Rush originally appeared on Fool.com and is written by Ryan Gilbert.
Ryan Gilbert has no position in any stocks mentioned. The Motley Fool recommends Goldman Sachs and Wells Fargo. The Motley Fool owns shares of Wells Fargo. Ryan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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