Lehman Says It's Time to Stock Up on Bank Shares

Bank stocks are about to get a lift from Lehman Brothers.

Jeffrey Applegate, the firm's chief equity strategist, is preparing a report that will urge investors to place one-quarter of their holdings in large financial institutions.

Mr. Applegate, who was readying his message before last week's rate cut by the Federal Reserve, said in an interview that he is now even more bullish.

The reduction of the federal funds rate by 25 basis points, to 5%, "should be an elixir" to financial institutions, reducing their cost of funds and helping move the yield curve in their favor, he said.

Mr. Applegate predicts even better times by summer, with the federal funds rate dropping to about 3% and the 30-year Treasury yield to 4%.

"The Fed must take firm and aggressive action to recalibrate the yield curve," he said.

As Lehman's prime stock picker and a frequent commentator on the market, Mr. Applegate will reach a wide audience with his endorsement.

It may breathe some life into a sector whose own industry analysts have been tempering their opinions, citing volatile market conditions and concerns about earnings.

In one regard, though, Mr. Applegate does resemble those analysts-they are all discriminating in their selections.

Mr. Applegate's favorite bank stocks are part of the Standard & Poor's financial index.

This group, to which he also called attention in a report last summer, includes Citigroup, Chase Manhattan Corp., State Street Corp., and U.S. Bancorp.

"The market's clocking of financials is way overdone," he said.

The banking industry is at its healthiest point in 30 years, he said. "The last time interest rates were this good was the late 1950s and early 1960s," when the country was also enjoying prosperity.

Back then, banks traded at 87% of the trailing market multiple, versus 55% now, Mr. Applegate said.

"A corollary to the good fundamentals is that earnings of financials have become both more predictable and more stable than the market," he said.