Goldman Shines, Morgan Stanley Dims in JMP’s 2020 Banks View

(Bloomberg) -- Economic and political obstacles in 2020, including the U.S. presidential election, mean investors should look for stocks that aren’t tied to the “macro backdrop,” according to JMP Securities.

Instead, they should seek companies with the potential for “company-specific change or for dislocated valuation,” analyst Devin Ryan wrote. That’s led to an upgrade for Goldman Sachs Group Inc. to market outperform, and to downgrades for Morgan Stanley, Apollo Global Management Inc. and KKR & Co. to market perform.

“Goldman Sachs is in the early stages of one of the most meaningful transformations within financial services,” Ryan said.

Investors may be “under-appreciating, or even dismissing, the evolution and growth shift occurring at the firm” as Goldman is pushing into new areas, like consumer banking and wealth management, without a need to protect existing operating margins or expensive infrastructure.

That’s happening as the 1MDB scandal seems close to a resolution in line with, or better than, expectations. Ryan called IMDB the “single most notable overhang on the stock” other than macro issues that could hurt Goldman’s legacy capital markets businesses.

The upgrade follows BofA’s, which said last week that Goldman was poised to benefit from more banking activity as the economy grows, and hailed its “strategic repositioning.” The firm has revamped the way it breaks down results by division to highlight growth in its consumer business and get more credit from investors.

Meanwhile, Morgan Stanley’s “results are more tied to the market backdrop” while the bank “already has a relatively mature platform and is growing from a large base (particularly in wealth management, where client assets total $2.6 trillion),” Ryan said. That means it’s “difficult to substantially move the needle,” he said. He added that executives may hesitate to “push the goalposts much, if at all,” when the bank offers updates with fourth-quarter earnings. Ryan also noted last year’s 29% stock increase in the downgrade.

JPMorgan Chase & Co. and Citigroup Inc. are due to kick off quarterly big bank earnings on Tuesday. Bank of America Corp. and Goldman follow on Wednesday, and Morgan Stanley reports on Thursday.

Goldman shares, which rose as much as 1.3% in early Monday trading, have gained 5.9% so far this year versus a 0.4% drop for the S&P 500 Financials Index. Morgan Stanley’s stock is up 2.1% this year; shares were little changed in early trading.

Read more: Jan. 9, Big Banks Will Show Same Strength as Jefferies, Katzke Says

Ryan downgraded alternative asset managers Apollo and KKR, citing significant rallies in 2019 driven by their conversions to C-Corps, strong “fundamentals” and a shift in the some of the companies’ earnings metrics. That boosted the “comfort of some of longer-term-focused investors that are less in the weeds on the day to day but can now better discount back future earnings potential,” he said. The risk/reward in the group is now “more fairly balanced,” Ryan added said.

Apollo’s shares fell as much as 1.7% on Monday; KKR’s were little changed.

JMP is also “relatively constructive” regarding e-brokers and retail brokers into fourth quarter earnings and 2020. “We really like the opportunity in the Schwab/Ameritrade combination,” he said.

To contact the reporter on this story: Felice Maranz in New York at fmaranz@bloomberg.net

To contact the editors responsible for this story: Catherine Larkin at clarkin4@bloomberg.net, Will Daley

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