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Shares of Goldman Sachs (NYSE:GS) were down more than 3% after a scathing opinion piece describing an eroding culture at the company was published in the New York Times. Though this might seem like a great buying opportunity, there are better financial companies to buy. Investors should consider firms which fared better in the Federal Reserve's stress test while enjoying the Goldman drama from the sidelines.

Greg Smith's OP-ED Piece

Greg Smith's article "Why I Am Leaving Goldman Sachs" made waves when it was published in the New York Times. It is not the first article which has openly criticized Goldman Sachs and its impact on society. However, it is unusually critical of potential conflicts of interest between the client and advisor which can erode integrity and confidence in a firm.

In financial services, actions taken on behalf of a client resemble zero-sum games in which the agent or advisor splits value with the client. The more the agent earns in fees, commissions, and miscellaneous costs, the less the client gets from a deal. The client's loss is the agent's gain. There is no synergy here, no magic way to cut the pie so that the slices add up to more than 100%. If a deal has a value of $100, negotiating a fee determines which party, the agent or the client, gets how much of that $100. If the agent negotiates an additional $5 of fees, then that means that the client gets $5 less at the end of the deal.

Principal-agent conflicts are nothing new, but the severity of Smith's criticisms and claims about Goldman's culture of squeezing profit out of clients would be funny if they weren't so sad. Consider how Smith's New York Times piece outlined three ways to rise to the top at Goldman:

"What are three quick ways to become a leader? a) Execute on the firm's 'axes,' which is Goldman-speak for persuading your clients to invest in the stocks or other products that we are trying to get rid of because they are not seen as having a lot of potential profit. b) 'Hunt Elephants.' In English: get your clients - some of whom are sophisticated, and some of whom aren't - to trade whatever will bring the biggest profit to Goldman. Call me old-fashioned, but I don't like selling my clients a product that is wrong for them. c) Find yourself sitting in a seat where your job is to trade any illiquid, opaque product with a three-letter acronym."

Smith also claimed that clients were often referred to as "muppets." He believes that the reigning question among junior analysts has become "How much money did we make off the client?"

Not to sound cynical, but this should not come as a surprise. Most of financial services resemble sales, and salespeople are ultimately driven to make money for themselves. Salespeople add nothing to the deal. They merely carve out a percentage for themselves, at the loss of buyer and seller. Clients should harbor a natural distrust of brokers and salespeople. They should also be skeptical of anyone in a suit: Such dress is an indication that someone feels entitled to sell them something for a lot of money.

How Goldman Compares to Sector Peers

All in all, this article will not ruin Goldman Sachs. However, even after the subsequent dip in price, Goldman is not the best investment among banks. The Federal Reserve's analysis showed that there are firms that would be better capitalized than Goldman in a super-recession scenario. Many of these firms are trading at greater price-to-book discounts too:

Ticker

Company

Stress Scenario Tier 1 Ratio

P/B

STT

State Street Corp.

15.1%

1.1

BK

The Bank of New York Mellon

13.3%

0.8

AXP

American Express Company

12.4%

3.4

FITB

Fifth Third Bancorp

7.7%

1.0

USB

U.S. Bancorp

7.7%

1.7

BBT

BB&T Corporation

7.3%

1.2

COF

Capital One Financial Corp.

7.2%

0.8

PNC

PNC Financial Services Group

6.6%

1.0

WFC

Wells Fargo & Company

6.6%

1.3

JPM

JPMorgan Chase & Co.

6.3%

0.9

KEY

KeyCorp

6.3%

0.8

C

Citigroup, Inc.

5.9%

0.6

GS

The Goldman Sachs Group

5.8%

0.9

Citigroup recently traded around $36 per share. Despite a 38.6% change in share price over the past year, shares of this large cap stock trade at a price-to-book ratio of 0.6, a price-to-earnings multiple of 10.2, and a price-to-sales multiple of 1.5 (trailing twelve months).

Over the past decade Citigroup shareholders enjoyed a 7.8% average annual return on equity. The firm is a dividend monster: For 9 out of the past 10 fiscal years, a share of C paid a total of $110.10 in dividends. CEO of Citigroup Vikram Pandit has expressed commitment to increase dividends for investors, and is expected to engage the Federal Reserve for a second round of analysis.

Like Citi, KeyCorp has not yet been approved by the Federal Reserve to increase dividends or share buybacks. Regardless, it is a better value than Goldman. At current prices near $8 per share, the stock has a price-to-book ratio of 0.8, a price-to-earnings multiple of 9.1 and a price-to-sales multiple of 2.7 (trailing twelve months). Also, it has a 1.5% dividend yield. For 10 out of the past 10 fiscal years, a share of KEY paid a total of $10.11 in dividends.

Key shareholders have seen a 7.8% change in share price over the past year. Over the past decade shareholders saw a 4.2% average annual return on equity. Like Citi, Key could re-apply to the Federal Reserve for approval of share buy-backs or dividend growth.

The Bank of New York Mellon is another financial services company which appears more attractive than Goldman. Traded near $23 per share, the stock has a 2.2% dividend yield. For 10 out of the past 10 fiscal years, a share of BK paid a total of $7.46 in dividends. Of these dividend payments, a total of $3.61 were paid in the last five years.

BK shareholders have savored a 17.7% change in share price over the past year. At present, shares of this large cap stock trade at attractive valuations: its price-to-book ratio is 0.8 and its price-to-earnings multiple is 11.5 (trailing twelve months). Over the past decade shareholders savored a 12.6% average annual return on equity. BK shareholders are likely to see share prices rise since the Federal Reserve and the firm's board gave share buybacks a green light.

Clearly there are financial stocks with better prospects than Goldman. These three alternatives are more compelling based on financial metrics while lacking the drama of a public relations nightmare.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Source: 4 Financial Stocks For Profits In 2012