As Some See a Top, Market Guru Says: 'Buy Banks'

Elaine Garzarelli, one of Wall Street's top market strategists, has a new message: Buy bank stocks now.

Ms. Garzarelli-who gained a big following by predicting the 1987 crash- said she sees strong earnings for banks, reduced sensitivity to interest rates, and perhaps most important, enduring demand by customers for financial services.

As proprietor of her own firm, which monitors all major industries, Ms. Garzarelli has generally been bullish on banking since 1995. But now she's talking up the industry more than ever-even as others fret that the long rally in bank stocks may be topping out.

"The industry is so good that you could throw darts at the sector and still come out a winner," she said in a telephone interview.

Ms. Garzarelli, 44, arrived at that conclusion after holing up in her East Hampton, N.Y., home for two weeks to study economists' reports, industry analyses, and strategic investment models.

This week she is on the road, presenting her findings to retail and institutional investors. Though her market predictions since 1987 haven't always been on the mark, her more than 50,000 clients continue to regard her as one of the very best market soothsayers.

On banking, Ms. Garzarelli's bottom line is that people are always going to need financial services, just as they need soap and groceries. On similar grounds, she supports such essential sectors as beverages and telephones.

"Banks are going to hold, no matter what," she said.

Banks, because of the cyclical nature of their earnings, have traditionally traded at a substantial discount to the market on a price-to- earnings basis. But now, Ms. Garzarelli said, there is potential for the group's price-earnings multiples to expand.

Indeed, she said she thinks regional banks, which trade at about a 25% discount to the Standard & Poor's 500's price-earnings ratio, should outperform the market by about that much this year. And money-center banks, which trade at an even deeper 33% average discount, may outperform the S&P 500 by more than 40%, she thinks.

The engine driving bank stocks is clearly their earnings power, said Ms. Garzarelli, whose overall earnings estimates for companies in the S&P 500 are currently the most conservative on the Street.

"We expect major regional banks to turn in superior earnings growth in 1997, with an absolute earnings per share gain of 13%," Ms. Garzarelli wrote in a recent report. Money-center profits are expected to grow 9%, compared to a modest 3% for the overall market.

Among her favorites in the regional sector are Republic New York Corp., Banc One Corp., Bank of New York Co., and BankBoston Corp.

Big-bank favorites include BankAmerica Corp., Chase Manhattan Corp., Citicorp, First Chicago NBD Corp., and J.P. Morgan & Co.

Though well aware of the consolidation wave washing over the industry, Ms. Garzarelli said her main concerns are the companies' fundamental business prospects, not merger possibilities.

"We don't look at that," she said. "But it's a plus if it happens."

In explaining banks' earnings power, she pointed out that the industry is no longer the rate-sensitive creature of yore.

"The deregulation of the banking system, the downsizing that has taken place, the efficiency with computers, and the flexibility that banks have going to the capital markets" make them much more resistant to interest rate fluctuations, she said.

Banks "still get hurt when the Federal Reserve raises rates, but they come right back."

Her bullishness on bank stocks has even carried over into a new balanced fund that invests heavily in financial companies. The fund, run by Steel Bokhof, who co-heads Garzarelli Capital, has $1 million under management.

The fund invests in such players as insurers and credit card companies, said Mr. Bokhof. It has stakes in First Union Corp., Republic New York, and Bank of New York, he said.

"Elaine is very positive on interest rates," he noted. Indeed, as she and others expected, the Fed left short-term rates alone at its monetary policy meetings last week.

In fact, according to her bond model, the 10-year bond should fall below 6% in 1998, from its recent 6.3%.

Meanwhile, Ms. Garzarelli does not foresee major corrections in the stock market anytime soon. She expects the S&P 500 to reach 950 during 1998 and the Dow Jones industrial average to hit 8,300.

The market is considered overvalued by some investment models because of its strength over the past six years and the historically rich price- earnings level of the S&P 500. But Ms. Garzarelli is unfazed.

"We do not focus only on price-earnings for our market forecast," she noted. "We realize the stock market has gone above fair value many times in the past without any major corrections."

Any correction that does come along will likely be no more than 4% to 7% of the market's overall value, she said.

The sudden, 192-point drop in the Dow last month was just par for the course, she said.

"You can't expect the market to go up every day," said Ms. Garzarelli's senior analyst, Alida Melkonian. "That doesn't even count as a correction. A 192-point drop in the market just isn't what it used to be."

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