If you believe, as most do, that interest rates will rise further, you need not abandon financial stocks, according to Sandler O'Neill & Partners.
In a report last week, analyst Mark Fitzgibbon identified 17 stocks that "would weather the storm better than most in coming quarters." The firm singled out companies that derive income from fees, have positioned their balance sheets to boost margins as rates rise, or have capital available for share buybacks.
He said some economists have raised their yearend targets for the federal funds rate to 7% or higher, which assumes the Federal Open Markets Committee would tighten at least 100 basis points in the next few months.
"While we are not convinced the Fed will be quite so hawkish, we do think it makes sense to prepare for the unlikely event that we are wrong by purchasing shares of companies that are less susceptible to a backup in interest rates," Mr. Fitzgibbon wrote.
The analyst picked six companies with strong fee-generating businesses: the insurers A. J. Gallagher of Itasca, Ill., and Brown & Brown of Daytona Beach, Fla., and the banking companies BB&T Corp. of Winston Salem, N.C.; Mellon Financial Corp. of Pittsburgh; Wilmington (Del.) Trust Corp.; and Wells Fargo & Co., San Francisco.
Commerce Bancorp of Cherry Hill, N.J.; Greater Bay Bancorp of Palo Alto, Calif.; and Metrocorp Bancshares and Sterling Bancorp of Houston have asset-sensitive balance sheets, meaning their profit margins would rise with rates because their assets reprice faster than their liabilities.
"They tend to have more assets that are tied to prime rate or London interbank offered rate," assets that "tend to be commercial loans," he said. Commerce, he added, would benefit from its "stable and growing base of checking and savings accounts."
Mr. Fitzgibbon recommends Charter One Financial of Cleveland, and Prosperity Bancshares of Houston - two companies with big mortgage holdings - as companies whose margins are expanding because they are "rapidly transitioning their balance sheets to higher-yielding loans."
He also picked five thrifts that have recently been converted to stock form and have large capital bases that enable them to support their stock price by repurchasing shares: American Financial Holdings of New Britain, Conn.; Connecticut Bancshares of Manchester; Rome (N.Y.) Bancorp; Troy (N.Y.) Financial Corp.; and Woronoco Bancorp of Westfield, Mass.
Mr. Fitzgibbon is among those who expect the Fed to increase the fed funds rate by 50 basis points Tuesday. "Anything less would be viewed negatively in the market," he said. Investors would foresee a series of adjustments that would be "like Chinese water torture."
Dow JonesJ.P. Morgan analyst Catherine Murray downgraded the shares of Chase Manhattan Corp. to "market perform" from "buy" and reduced her 2000 earnings outlook to $6 a share, from $6.51.
Ms. Murray is maintaining her 2001 earnings view for Chase at $6.98, though she said that would be low if the Nasdaq rebounds in the next 18 months.
Despite the downgrading, she said, investors with a longer-term perspective may want to hold shares of Chase until the volatility eases.
"We continue to believe global capital markets will be a good business over the medium term," she said, "and there is a great deal of inherent value in Chase Capital Partners."
Chase shares gained $1.625, to $71.625, on Friday.