Stocks: As Banks Languish, Profitless Dot-Coms Defy Gravity

Bank and other financial stocks tend to be sold at a mere hint that interest rates might rise, but they also are the victims of investors' craze for Internet stocks, analysts say.

Much like wallflowers at the prom, financial stocks this year have lacked sexiness compared with "dot-com" equities.

While money has flowed out of bank funds this year, technology funds have enjoyed enormous popularity and cash inflows.

That helped drive up the technology-laden Nasdaq composite index by 56% so far this year, compared to a drop of 7.8% for the Standard & Poor's index of 31 banks.

Despite projections that banks' per-share earnings will grow 8% to 10%, the price-earnings ratios on most of their stocks range between 10 and the mid-teens.

P/E ratios of many Internet stocks are more than 100, and for some, infinite, because they have no earnings, only hopes. That promise has kept retail investors away from banks and other less exotic sectors, analysts say.

"We're in a world that wants 30% to 40% annual returns," said Fred D. Price, principal at Sandler O'Neill & Partners in New York. "It's going to be a while before the financial industry gets some attention again."

And says Frank J. Barkocy, principal and senior analyst at Keefe Managers Inc. in New York, "at some point we will see a shift out of the technology sector."

"A more realistic view of the fundamentals in that sector and some shaking out of Internet companies would result in shifting to other groups," he said, "including the financial sector. Either that, or we'll have to put dot-coms next to all financial names."

Though several bank stocks this year have gotten hammered because they missed earnings projections, most dot-com equities have defied gravity. Dot-coms, with no earnings, often express their value in terms of revenue growth. Such logic usually doesn't apply to other industry groups.

"Nobody will value financial stocks purely on revenue multiples because they already have earnings," said Scott Edgar, director of research at the $1.1 billion-asset Sife Trust Fund in Walnut Creek, Calif.

"You have tremendous rates of revenue growth among Internet companies, but they are not earning anything in line with those revenue projections. Some day, those rates of growth will translate into net income for only a very few."

The question is when. Perhaps Tuesday might have been a harbinger of a reality check. The Goldman Sachs index of Internet stocks fell 33.55 points, to 574.72, but the American Banker index of the nation's 50 largest banks gained 1.43%, and the American Banker 225 was up 1.71%.

"We can wax poetic about valuations that are unjustifiable," Mr. Edgar said. "But all the stock performance has been on the Internet and tech stocks. It has paid people to ignore fundamentals and earnings, which drives most of us money managers crazy."

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