Analyst Famous for Gloom Decides It's Time to Buy
Shucking his image as a renowned bear among bank analysts, George M. Salem of Prudential Securities is sounding positively bullish.
For the first time since early 1989, his buy recommendations outnumber the stocks Mr. Salem is advising investors to sell.
The buy list features such names as J.P. Morgan & Co., Bankers Trust New York Corp., and Banc One Corp., stocks that have already won rave reviews from most securities analysts.
This may be a sign that the industry is sounder - or merely that Mr. Salem is late to a party that is almost over. But in either case, his reversal is viewed by other observers as a sea change in the outlook for banks.
At the top of Mr. Salem's buylist is J.P. Morgan, the subject of a glowing 120-page research report replete with copies of Morgan advertisements meant to illustrate Morgan's investment banking focus.
He is predicting 30% earnings growth this year for Morgan, and growth of 15% to 20% in each of the next two years.
"This is a company that is on the threshold of new growth and new excitement," he said. Morgan has spent the past dozen years positioning itself to burst on the international investment banking scene in a much bigger way, he said.
Certainly, most analysts endorse Morgan's investment banking strategy and conservative credit culture.
But one analyst implied that Mr. Salem has gone overboard in his estimate of Morgan's earning power. "For levels like that, you'd have to have a very cooperative economy."
Mr. Salem insists his recommendations reflect the same concern for quality that prompted him to blast some banks in the past.
Analysts who do not share his view of Morgan, he said, are underestimating the potential of Morgan's trading business, which will contribute 40% of the bank's income henceforth.
His research, coauthored by Ruchi Madan, noted $959 million in trading profits for Morgan in 1990 (which Mr. Salem dismissed as a "so-so" year) and projected $1.3 billion in trading profits this year.
Can't Stomach It
Interest rate swaps and other securities whose value depend on fluctuations of various indices will be especially profitable, Mr. Salem contended.
One of Mr. Salem's remaining sell candidates was Security Pacific, whose stock ran up in value when its merger with BankAmerica Corp. was announced. But Mr. Salem said he can't stomach the idea of choosing banks based on the theory that they are likely to be acquired.
"Merger analysis is something that has to be considered," Mr. Salem said. "But it's secondary or tertiary to the basic story."