After a Pause, Bank Stocks Running with the Bulls Again

After briefly slipping behind the pace of the surging stock market last week, bank stocks rejoined the bulls as profit-taking gave way to fresh buying.

Banks have ridden a red-hot rally since July that has pushed many share values to near or even above Wall Street analysts' price targets. A host of downgradings last week slowed the stocks, but only temporarily.

Meanwhile, finance company stocks couldn't be bothered to take even a momentary pause last week as investors continued to focus on the high- growth companies in this sector.

For the week ended Thursday, the American Banker index of the 50 largest bank stocks was up 0.15%, versus a 1.13% gain for the Standard & Poor's 500 stocks, while the Banker index of finance company shares rose 2.20%. The finance company index comprises 15 major auto, mortgage, and consumer lending companies.

Analysts said holders of finance companies were less inclined than bank investors to take profits because many believe considerable upside remains in the stocks, given their earnings momentum.

"The finance companies have benefited from a relatively benign environment in which originations have been strong, spreads wide, and credit quality fair," said industry analyst Michael K. Diana of Bear, Stearns & Co., New York.

"We don't see a recession, or interest rates going up, so finance companies should continue to do very well," he said. Investors in these stocks can be expected to "stay as long as they see earnings potential," he added.

Regional banking analyst Mark Alpert of Alex. Brown & Sons, the Baltimore brokerage, said the average bank has an expected earnings growth rate of 10% and sells at 12 times next year's earnings, while some specialized companies trade at a similar multiple with an expected growth rate of 20%

"The average regional bank stock in our universe is up 28%" for the 12 months through October, "while the finance specialty stock is up 38%," he said.

Other analysts noted that bank investors were inclined to profit taking, at least in passing, because they found bank stock price-earnings multiples too "lofty" compared to their historical levels.

Yet another reason that many finance company stocks have surged recently relative to banks is that many had not risen as the rest of the market did during the recent bond rally, said finance analyst Thomas Facciola of Salomon Brothers Inc.

Some of the biggest gainers last week included Beneficial Corp., Money Store, and Olympic Financial.

Mr. Facciola noted that finance companies are also benefiting because "the growth player is not as sensitive to valuation as the value investor. The ceiling for the finance company is higher."

Analyst Joseph Jolson of Montgomery Securities, San Francisco, noted that, while a number of finance companies have indeed risen substantially, some stocks in the sector have sold off.

He pointed to Aames Financial and Cityscape, whose stock prices have slipped below their highs.

Mr. Facciola said: "Some companies' stocks have gone too far, too fast." If the stock market were to undergo a serious correction, he said, some finance companies might fall more than 20%.

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