3 reasons why Goldman Sachs is the 'pure investment bank' play

The banking sector is in a unique time and place as investors navigate economic conditions, such as higher for longer interest rates held by the Federal Reserve. As part of Good Buy or Goodbye, Infrastructure Capital Advisors CEO Jay Hatfield joins Yahoo Finance's Julie Hyman in-studio to highlight the investment opportunities found in financial institutions, namely Goldman Sachs (GS)

Goldman is Hatfield's champion among investment banks, pointing to its year-to-date outperformance, its position as a derivative AI play, and IPO market forecasts.

"We think that the AI IPO boom will start in [2025], which it normally does because that's why the US capital markets are so efficient, is that high valuations of the public companies generate IPOs," Hatfield states. "So we think it's a little bit of a longer-term play. That's why even though the stock is working now, we don't think it's overvalued and even will get better as we go through the summer, have rate cuts at least from the ECB [European Central Bank], and then have a rally in '25."

On the other hand, Hatfield is bearish on regional banks, citing the higher rate environment and pressures on the credit market.

Catch more of Yahoo Finance's Good Buy or Goodbye, or watch this full episode of Market Domination.

This post was written by Luke Carberry Mogan.

Video transcript

It's a big noisy universe of stocks out there.

Welcome to, goodbye or goodbye.

Our goal to help cut through that noise to navigate the best moves for your portfolio.

They were passing through the banking sector and joining me here to discuss is Jay Hatfield, infrastructure capital advisors, CEO J come on down here so we can get you the stocks that you like.

First.

Let's start there and it's Goldman Sachs.

So Goldman Sachs interestingly has already had a pretty good run over the past year.

You can see the stock has moved higher, moved higher again after its most recent earnings.

So let's get to why you still like it here.

First of all, you say it's still trading at a relatively attractive multiple.

Yes.

In fact, we're actually carrying estimates 10% above consensus.

So it's 11 times consensus and we're at 10 times.

And the main reason that we're above consensus is that we're more optimistic about investment banking and really Goldman is the pure investment bank of all the investment banks.

And I think most people don't appreciate, I used to work at an investment bank.

Um and they don't appreciate the synergies between investment, banking and capital markets.

So when you do deals, then that generates extra trading for the trading operation and you saw that in the first quarter, but really the whole firm just outperformed.

Yeah.

And let's dig into that a little bit more because we are seeing that we're seeing fixed income uh underwriting.

We're seeing also that sort of capital markets are perking up a little bit in some areas.

There's a little more M and A coming out there are a little more initial public offerings.

So you think that's going to be good for me, do.

And even in 25 you just had an A I great A I segment.

We think that the A I IP boom will start in 25 which it normally does because, and that's why the US capital markets are so efficient is that we um you know, high valuations of the public companies generate IP OS.

So we think it's a little bit of a longer term play.

That's why even though the stock is working now, we don't think it's overvalued and even will get better as we go through the summer have rate cuts, at least from the ECB and then have a rally in 25 right?

And I think our last one was that derivative A I play.

There's also the fact that they exited the consumer business and sound.

No, now they're even a more, well, they were a pure play then.

They got into the consumer business.

It didn't go so hot and then they got out of it.

So they're back to being right.

And I think that's why the multiples lower, like Morgan Stanley trades at 13 times.

They were more resilient during the downturn because they have more steady wealth management.

Goldman's more is about 80% banking, investment banking and Morgan Stanley is 40.

So we think it's time to kind of rotate from the safe safer.

I mean, we wouldn't be out of Morgan Stanley, but we're short.

It certainly, but gonna trade pretty well together.

But to get more leverage to banking from Goldman Sachs got you a little more.

Um uh we always like to talk about what the risk is in this situation and in this case, it's, you know, if markets don't do as well, then they could be a victim of that because they don't have that insulation, right.

This is absolutely a bull market play.

I remember when I started on Wall Street at Morgan Stanley during a down cycle in 89 we were turning a 0.4 times buck.

I mean, it used to be these investment banks just got smashed.

So they are high beta stocks, 1.2 beta, very correlated in the market.

If we're wrong about, we're bullish on the market, we have 5750 target.

But if we're wrong about that, you don't wanna be in financials and certainly not in investment banks got you and you have, you guys have a pretty decent position and it is our largest position in icap.

So we're pretty um bullish about it, but it's a sector we know we're in Manhattan.

I worked in investment banking.

I understand that, that when things start going, this is just the beginning in our opinion of the boom.

All right, let's get to an area you don't necessarily want to be.

And that's in more in the regional banks.

And here we're showing PNC financial is just one example of the regionals which largely have underperformed some of the other, some of the larger financials over the past year.

So there you're looking, they don't have the benefit of being as much in the capital.

They're 5% to pick on PNC.

They're just 5% capital markets.

Got you.

So that compares with Goldman.

That's, that's all all of it.

Right.

Exactly.

So one reason there that they're not gonna benefit um net interest margins have been under pressure and talk to us about how that's working for the regionals relative to rates as well, right.

So PNC is forecasting themselves about a 5% decline in net interest margin.

And the problem is when rates go up really fast, uh the deposit beta as they call it the or the sensitivity to interest rates start hitting, which is just a complicated way of saying people realize they can get 5%.

So they're not gonna leave money in a checking account or a six month CD.

So they've seen those outflows, which means they, it's just March, it's pressured and also they have slow loan growth too as well.

Uh They're probably being conservative about putting credit out right now.

So those two things are putting pressure might get better in 25.

But you have something that's declining with regionals and something that is booming with the investment bank focused And also they tend to have less exposure to that interest margin as well.

And the other thing, we've all been trying to sort of read the tea leaves on the consumer, you know, in from the payment companies by now paying later from the regional banks themselves, from retailers.

And it does feel like they're starting to see some deterioration on the, on the lower end, at least.

Definitely.

I mean, if you just think about it, it's sort of there's a have and have nots in the US consumer, anybody who owns a home did really well from the inflation and anybody who doesn't did really poorly because they had to pay really high rents that are flat now but not going down.

So if your wages didn't keep up, so it's definitely pressure on the lower income consumer unclear how that's gonna unfold.

But if you look at the more investment bank oriented, they have particularly Goldman's now getting out of it, they have less exposure to that.

These, these large banks their credit exposure is hard to track.

They're not like reeds where you can model every building.

So we don't really know what's going on there, but it's a potential downside.

And could we see defaults, for example, that would affect, rising slowly already?

We don't think they're going to be terrible, but if the fed didn't cut rates, we might have a slowing economy recession.

So we just further risk, um, without the upside of investment bank.

And so conversely, we'd like to talk about what could go right for the regionals and it's what you kind of just referred to that the fed could cut and maybe cut a little more aggressively than expected, right?

If they, if the yield curve de inverts and, and we're well into 25.

So the longer term story, the banks are gonna do fine.

And by the way, if there's a bull market, they're gonna go up there risky stock, cyclical stocks.

So it's, it's probably could be a situation where invest in 25 maybe investment banking is kind of already full at full force and then it's time to rotate into and, and benefit from the net interest margin slowly getting better in 25.

And as for the regionals, do you have any position there?

Are you sort of under way, we're, we're intentionally completely out of regionals and in not just in the investment banks but in the money center banks that tend to be better hedged less dependent on net interest margin have more capital markets upside.

So they're just better positioned in our opinion, in this market.

Ok.

So let's summarize what you're telling folks, Jay here.

You're saying you would recommend buying Goldman Sachs given that reasonable trading, multiple potential benefits from avenues like fixed income, underwriting other capital markets and A I related IP OS coming down the pike and you say avoid regional banks, there's limited upside from capital markets.

They're not as exposed.

There's possible pressures on profitability from rate cuts and potential for credit metrics to worse.

And thanks so much for being here.

Good to see you and thank you so much for watching.

Goodbye or goodbye.

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