It’s always fun to dig through a major hedge fund and institutional investors 13-F reports to see what the “gurus” find interesting in the market. Naturally, Warren Buffett’s and his lieutenant stock picks are often at the top of most investors must see list. And in this quarters 13-F, Buffett made a big-time purchase of the Vampire Squid itself- Goldman Sachs (NYSE:GS).
While it’s not Buffett’s first foray with owning Goldman, it is his biggest outright purchase of GS stock. And it’s a little bizarre considering that Goldman isn’t the type of financial firm that Buffett usually buys.
Or is it?
The truth is, Goldman Sachs could be quickly becoming a great Buffett pick. The firm’s fast-growing consumer banking arm has plenty of potential for the kind of profits and steady cash flows that Buffett (and you) should love.
Buffett and the Big GS Buy
During the dark days of the recession and when the entire world was falling apart, Berkshire Hathaway (NYSE:BRK.B) stepped in and gave Goldman Sachs a huge life-line.
In exchange for a measly $5 billion, Buffett scored 10% yielding preferred stock and warrants allowing it to buy an additional $5 billion in common stock. Buffett eventually exercised those warrants and exchanged the preferred shares into more than 43.5 million shares of GS stock.
The deal truly was an opportunistic one and Buffett smelled blood in the water. GS needed cash now and Buffett was more than happy to lend them money at an insane rate. And over the next few years after exercising the warrants, Buffett mainly sold off his GS stake aside from a few token shares.
But lately, Buffett has been buying rather selling GS.
Digging into Berkshire’s 13-F, over the last quarter, the insurance giant purchased 2,294,971 shares of Goldman, a more than 20% increase in its holdings. All in all, Buffett now owns more than 13 million shares of the investment banking giant.
The question is, why the big buy in the first place? After all, Buffett spent much of the last decade dumping GS stock. And Goldman Sachs isn’t exactly the kind of financial firm he’s used to buying. GS isn’t in the same vein as Bank of America (NYSE:BAC) or U.S. Bancorp (NYSE:USB). This is the firm “Doing God’s Work,” and we’re talking about the Vampire Squid after all.
Goldman Sachs Change in Focus
But Goldman may not be the blood-sucking vampire it once was. Yes, prop-trading and investment banking is still a huge part of the firm culture and revenues. However, what Buffett wants starts with a capital “M” as in Marcus.
Over the last few years, GS has quickly become a consumer banking giant. The launch of its Marcus high-yield savings and personal loan products has been a pretty big game changer for the firm.
As of the end of the second quarter, Goldman reported making more than $4 billion in consumer loans through Marcus and has managed to grow their retail deposit base to over $23 billion. That’s a huge amount of growth in such a short time and shows that its platform is working well.
The beauty is that unlike other legacy banks like J.P. Morgan (NYSE:JPM), Goldman didn’t do lending or retail banking before Marcus. It was able to build-out the digital platform using its risk-controls from the ground up. There was no integration of old systems. This fact has allowed to scale up rather quickly.
And scaling it is.
Goldman Sachs has plans to use Marcus to become a full-on consumer bank and asset manager. In a recent presentation, GS listed four main points for Marcus: Borrow, Spend, Save, and Protect. Those four categories highlighted products from mortgages and auto loans to life insurance and mobile payments.
Front and center were the firm’s Clarity and Marcus applications. What’s really crazy is that a firm, whose real mission was catering to the wealthiest citizens is now targeting everyday Joes.
This is a huge opportunity to get consumers into its system, cross-sell higher margined products like loans and asset management, all while getting a steady stream of deposits onto its balance sheet. The kind of deposits protected by the FDIC that it can go play it.
For Buffett, this is a huge opportunity as well. There’s not much more scale JPM or Bank of America can really have. The growth simply isn’t there. But for Goldman Sachs- which is just at the beginning of their banking journey- there’s plenty of runway left.
Even better is that GS stock has been underperforming its peers because of its Vampire Squid moniker. In the end, Buffett bought one of banking’s biggest stories for a bargain.
Buying Goldman Sachs Stock
For investors, GS offers a chance to participate in the birth of a potential banking giant. The growth in deposit base and loan volume is already pretty striking. And with the addition of additional products, Goldman has the ability to scale up rather quickly. With its focus on risk assessment and prime consumers, much of the downside is limited. Buffett or one of his chiefs saw the potential and you should too.
All in all, Goldman Sachs is leaving its former “evil” moniker and becoming one heck of a bank.
As of this writing, Aaron Levitt did not hold a position in any of the aforementioned securities.