Investors searching for a fresh strategy for buying bank stocks may need to look no further than the familiar Standard & Poor's 500 stock index.
In less than a year six banking companies have been named to the S&P 500, an honor that boosted the value of their shares by as much as 15.9% on the first day they were listed, bank analyst Henry C. Dickson of Salomon Smith Barney Inc. pointed out in a recent report.
And as banks become heftier through mergers and acquisitions, the S&P committee determining which companies' stocks are included in the renowned market yardstick is likely to add more banks, he said.
"When a company is added to the index, many mutual funds and other money managers that track the index are compelled to buy the new S&P 500 stock," said Mr. Dickson. That drives the stock up.
The recent additions are Huntington Bancshares of Columbus, Ohio; Synovus Financial Corp. of Columbus, Ga.; BB&T Corp. of Winston-Salem, N.C.; Summit Bancorp of Princeton, N.J.; Northern Trust Corp. of Chicago; and Mercantile Bancorp of St. Louis.
Huntington was added to the index last Aug. 5; its share price jumped 5.19% that day. BB&T's shares shot up 15.9% and Northern Trust's 4.67% the days they were added.
"The average return of the last six bank stocks added to the S&P 500 exceeded 10% in a single day," Mr. Dickson said.
The reason to expect more banks to be added to the best-known broad market index is simple: The S&P 500 is weighted by market capitalization, and bank valuations are among the largest in any industry, the analyst pointed out.
Mr. Dickson said that investors should snap up banks with high market capitalizations.
"The theory is that when banks are removed from the S&P 500 due to consolidation, which we expect to continue, the higher capitalization names not on the list become the most likely banks to be added to the S&P 500," Mr. Dickson wrote in his report.
Other criteria that the S&P index committee considers before making selections include whether candidate companies are in an important industry segment, have ample liquidity in their stocks, and are "rigorously analyzed."
Other banks are likely to follow.
Though banks that leave the S&P 500 are not necessarily replaced by other banks, consolidation in the sector will leave several openings, Mr. Dickson said.
Mr. Dickson said banks likely to be selected include Regions Financial Corp. of Montgomery, Ala.; Crestar Financial Corp. of Richmond, Va,; SouthTrust Corp. and Amsouth Bancorp., both of Birmingham, Ala.; Star Banc Corp. of Cincinnati; and Marshall & Illsley Corp. and Firstar Corp., both of Milwaukee.
Brokerage and finance firms likely to be selected include Bear, Stearns & Co., Sallie Mae, PaineWebber Inc., Capital One Financial Corp., and Donaldson, Lufkin & Jenrette Inc., he added.
"Fundamentals and consolidation will always be the most important reasons for investing in banks stocks," Mr. Dickson said. "But if you are still wavering on whether you should invest in a particular bank or not, this strategy can help you make that decision."