In a new indication of how the stock market is coping with the diversification of big financial companies, A.G. Edwards & Sons Inc. analyst Diana Yates expanded her coverage to include Goldman Sachs Group Inc., Merrill Lynch & Co. Inc., and Morgan Stanley Dean Witter & Co.

Perhaps more interesting than her initial rankings - Morgan and Merrill netted "accumulate" ratings while Goldman was ranked a "maintain" - was the rationale behind the additions to Ms. Yates' coverage universe and her reasoning for giving the two retail powers the nod over Goldman. Ms. Yates said the new companies "bring more diversified financials into my group," adding that it "makes sense to get the full picture."

She favors Merrill Lynch and Morgan Stanley because she believes that diversified brokerages have more areas to pull from for earnings growth, she said.

Both have retail and institutional client bases, while Goldman Sachs lacks a retail business.

Goldman Sachs' shares fell $4.9375, or 4.9%, to close at $96.1875, while Merrill Lynch dropped $1.875, or 2.9%, to $63.275, and Morgan Stanley's decreased $3.125, or 3.9%, to $78.125.

The American Banker index of 225 banks fell 0.62%, and the index of the top 50 banks dropped 0.48%. The Dow Jones Industrial Average fell 2.6%, and the Standard & Poor's 500 lost 2.4%. The Nasdaq index declined 5.6%.

Ms. Yates follows a range of financial companies - Chase Manhattan, Citigroup Inc., J.P. Morgan, Wells Fargo & Co., FleetBoston Financial, Comerica Inc., Mellon Financial Corp., Northern Trust, Wilmington Trust, and Bank of New York, and is considering adding Lehman Brothers and Bear Stearns. The analyst is also scouting companies that have shifted their primary business model, such as PNC Bank, which is putting a greater emphasis on asset management and less on traditional banking, another possible addition, she said.

Goldman Sachs, Ms. Yates' report says, is strong in merchant banking and asset management and services, but the analyst is "wary of the illiquid market for both high-yield securities and syndicated loans, product segments in which Goldman is active." Ms. Yates said she does not expect Goldman to incur large losses, but she "would feel better with more revenue diversification."

With its pool of potential partners thinning, Goldman Sachs - dependent on relatively stagnant markets without a counterpart to balance out tough times - is in jeopardy of being left behind.

Ms. Yates said she has been working on the newly-added stocks for a while, and released the ratings now because she expects "continued strong market activity." A.G. Edwards does not underwrite Goldman Sachs, Merrill Lynch, or Morgan Stanley stock, Yates said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.