While bank and brokerage stocks took a dip last week on uncertainties about the presidential election, thrift shares continued to outperform banks.
The American Banker thrift index fell 0.75% Friday. But its index of 225 banks dropped 2.3%, and its index of the top 50 banks decreased 1.59%. Worries about asset quality among banks had shifted investor attention toward thrift stocks this summer. Investors have not shifted back to banks, even after third-quarter results indicated that bad loans were less of an issue than most investors had feared.
One reason for the thrifts high rise is that the banks credit quality issues have not completely disappeared. Thrifts, often family lenders and mortgage providers, are considered less exposed to corporate and syndicated loans, which could take a bad turn if the economy continues to slow.
Analysts say that, as the economy completes a soft landing, thrifts are still considered a safe haven. Some analysts also said that most thrifts have shown improved margins, thanks to stable interest rates. Thrift margins are expected to bottom during the fourth quarter, and many analysts continue to be bullish on them.
Our investment thesis is simple, said Thomas Theurkauf of Keefe, Bruyette & Woods Inc. The stocks are inexpensive, based on generally accepted accounting principles and price-earnings multiples, and are very well-insulated from the credit cycle.
Nevertheless, even if thrifts are moving as a group right now, there are considerable differences in their business models. James M. Ackor, an analyst at Tucker Anthony Capital Management, said some thrifts, like Astoria Financial Corp. and Queens County Bancorp, concentrate on family lending, while others have moved to diversify their income, the way banks do.
Mark T. Fitzgibbon, an analyst at Sandler ONeill & Partners, gave his top buy rating to Bancnorth Group, whose business model now resembles a community bank, he said, and Bostonfeld Bancorp, which he said is starting to do likewise.
However, analysts said that thrift valuations are not where they were in spring 1998, just before the Federal Reserve began to increase interest rates, sending shares of banks and thrifts down. Analysts said they doubt whether they succeed in outperforming banks in the long run.
In the long term, banks will outperform thrifts, because banks have the better business model, Mr. Fitzgibbon said.
Mr. Ackor agreed that the run on bank stocks might be short lived. Fundamentals do not always dictate stock prices, and in the long run those companies with long-term strategies will see their shares appreciate, he said.