Goldman Sachs said Tuesday it selectively upgraded shares of financial services companies as well as the brokerage and asset manager sectors, but remains cautious on stocks of regional banks, mortgage and specialty finance companies and real estate investment trusts.
In upgrading the brokerage and asset manager sectors, Goldman said the recent fears have been exaggerated and are mostly reflected in the prices of the stocks. Both sectors were upgraded to attractive from neutral.
"We have reached an inflection point for stocks with little credit exposure, or where exposure is marked to market," Goldman said in a research note. The firm expects a recovery in equity flow trends in the second half of 2008, but said this anticipated rebound is not yet priced into the stocks.
"Many stocks offer upside twice that of downside risk, balance sheets are strong, and looking a bit further out to 2009, valuations appear extremely compelling," said Marc Irizarry, an analyst at the firm.
It also reiterated its conviction buy list rating for Morgan Stanley shares.
Also upgraded were shares of American Express , Bank of New York Mellon , and Janus , which all were upgraded to buy from neutral.
Shares of Discover Financial were upgraded to neutral from sell, with its 12-month price target increased to $17 from $14.
However, shares for Marshall & Ilsley were downgraded to sell from neutral, with its price target reduced to $22 from $26.
Meanwhile, shares of Wells Fargo , Zion Bancorp , Lazard , Federated Investors , Knight Capital and Och-Ziff Capital Management were all downgraded to neutral from buy.
Goldman expects the regional banking sector to still face headwinds in the construction and home-equity lending.
The banks that are believed to be most at risk from capital strain include Citigroup , Wachovia , Huntington Bancshares and First Horizon National , Goldman said. The company added it is "particularly concerned" about funding risks for commercial lenders such as CIT Group , iStar Financial , NewStar Financial and CapitalSource .