Most of the large bulge bracket firms reported earnings recently, and so now it's time to decide which firm is the best investment from here on out. Here's how the big brokerage firms fared:

Brokerage Earnings Summary
For starters, Bear Stearns (NYSE: BSC) actually missed EPS estimates last week. If a brokerage firm doesn't exceed Wall Street targets, it's automatically booted from the best-brokerage-firm competition. There seems to be a feeling that the industry has gone soft on its own earnings capabilities, so, if anything, Bear Sterns should have had a better chance of exceeding earnings estimates. The only saving grace for Bear Stearns is that if any company out of the bulge bracket firms was vulnerable to a takeover, it is this one.

Lehman Bros (NYSE: LEH) was the first to report last week and it did beat its earnings target. The company has been doing well in underwriting and in trading. Its shares have risen nearly 10% since a couple of days before its earnings were released.

Earlier this week Morgan Stanley (NYSE: MS) reported a blowout quarter as well, although there has already been a huge recovery here. Shares are up more than 50% since John Mack returned to the helm. We also already know that the Discover credit card unit is being spun-off. That has added some juice to the stock, but until details are known, nothing can be said for sure.

That leaves Goldman Sachs (NYSE: GS) for review. Goldman Sachs did beat earnings, but it wasn't by as wide of a margin as Wall Street generally likes to see. Although it is somewhat of an industry-wide problem, Goldman usually takes fire for its year-end bonuses - bonuses that come at the expense of shareholders. (To learn more, read Lifting The Lid On CEO Compensation.)

What is interesting about Goldman Sachs is that it is still considered the premiere broker out there. You can understand why when you consider that you must have $5 million just to open an investment account that its brokers will care about. Goldman Sachs is perhaps the most entrenched in the private equity field, but it also has a substantial international operation and has started playing a huge role in infrastructure and privatizations.

Goldman Sachs matches or outperforms its peers in traditional brokerage, private research, investment banking and securities trading. It has probably the widest cross section in traditional larger-business operations in private equity and infrastructure.

Industry Performance and Determination
Here is the approximate performance over the last two years: Goldman Sachs +120%, Morgan Stanley +70%, Lehman +70% and Bear Stearns +40%. It gets very difficult to think that the most upside potential rests not with Goldman, but the remaining firms.

So, on a relative performance basis, it would be easy to say the best days are behind Goldman Sachs. There is a reason for this: earnings growth. In comparison, Morgan Stanley is already unlocking value in the Discover spin-off. Bears Stearns is now an underperformer, and Lehman is in the wild-card spot.

And the Winner is...
Goldman Sachs is just too good not to pick. Sure, it has greatly outperformed on a relative performance basis. But, its current valuations are not at a premium to peers. All of these firms trade roughly between 10-times and 11-times earnings.

Goldman Sachs has what appears to be the highest hidden value and unlocked value out of the entire group. If any brokerage firm was hiding a miniature Berkshire Hathaway (NYSE: BRK.A) in its other operations, it is Goldman Sachs.

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Tickers in this Article: GS, MS, BSC, LEH, BRK.A

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