Bank stocks are giving Ronald K. Stribley good reason to smile.
"The banks had a great third quarter. They were our best performing group," said the portfolio manager at Philadelphia's Glenmede Trust Co.
And he expects further good times in view of the trend in the economy toward lower interest rates and marginal inflation, an environment not seen on a sustained basis for at least a quarter of a century.
"We don't detect much inflationary pressure," he said in an interview last week. "Banks have historically done well under these conditions,"
Mr. Stribley has positions in Citicorp, Chase Manhattan Corp., NationsBank Corp., First Interstate Bancorp., and most recently, BankAmerica Corp. On average, those banks have gained around 60% in value this year.
Shares of Citicorp were up 71% through Sept. 30 and recently have traded above $70 per share. Mr. Stribley mostly acquired the stock in "the mid-to- high 30s."
Chase Manhattan was up an even more notable 77.8% through the first three quarters of the year, much of that during the most recent period because of its pending combination with Chemical Banking Corp.
The shares of First Interstate, NationsBank, and BankAmerica are all up around 50% in value this year.
Financial stocks now make up about 16% of Mr. Stribley's portfolio, versus about 12% of the Standard & Poor's 500 stock index that is the standard yardstick of the stock market.
"Our weighting for financials ranges from 6% to 18%, so you can see that we are near the potential high point," Mr. Stribley said. "But I could probably find room for one more stock if I found it to be attractive."
If it were a bank, it would probably be a midwestern bank. The portfolio manager likes geographic diversity when it comes to banks, and he notes that the nation's heartland is the area missing from his basket.
But the guiding investment tenets at Glenmede for stocks is that they must have dynamic earnings prospects and be relatively undervalued.
Or, as Mr. Stribley succinctly puts it, "Cheap stocks with rising expectations."
Glenmede manages about $8 billion for institutional investors and high net worth individuals. Its largest single client is the Pew Charitable Trust, begun by the founding family of Sun Co., the petroleum giant.
Mr. Stribley's focus is institutional customers, including profit- sharing plans, pension funds, endowments, foundations, and charitable organizations.
A graduate of Babson College and an analyst and money manager for more than 20 years, Mr. Stribley joined Glenmede five years ago. Previously he held posts at Trinity Investment Management and Provident Capital Management.
Glenmede, a privately held firm, uses a quantitative investment research model that is based on relative price-to-earnings ratios of stocks and changes in earnings momentum for companies.
Currently, Mr. Stribley said, "We are seeing a lot of estimates being cut. The technology companies are being cut, and the consumer cyclicals are being cut, along with others."
That makes the bank sector, where the earnings estimate changes are still positive, attractive by contrast. "For the most part the banks are still showing positive revisions, and we find that encouraging," he said.
The key to the banks' outlook, he said, is the expectation of low inflation and - the chief way that expectation is manifested in the market - low interest rates.
"If rates stay where they are or move down, banks could do well indefinitely," the portfolio manager said. And he expects the Federal Reserve to trim short-term rates further, perhaps by the end of the year.
The Fed eased rates modestly last July, slicing a quarter point off its federal funds target rate. It has demurred on further reductions, but Mr. Stribley notes that the central bank rarely implements monetary policy in one step.
From an investor standpoint, this encouraging scenario means bank stocks might finally break above the discounted price-to-earnings range they have occupied relative to other stocks.
For several decades, as inflationary fears kept rates historically high, bank stocks have typically sold at no more than two-thirds of the value of other stocks on a price-earnings basis.
But in some earlier periods of quiet inflation, bank stocks sold at much higher relative values than recently. Some analysts feel the table could be set for a return to higher valuations.
Mr. Stribley thinks that could happen. Or, alternatively, bank price- earnings ratios could remain about where they are while their earnings rise more than other companies'. That would still give the stocks "a positive bias."
On the other hand, if the economy weakens significantly next year, banks could begin incurring loss problems and need to build reserves, which would hurt earnings and stocks.
Mr. Stribley said that appears unlikely now, but at the same time he cautiously noted that "it is always hard to know where banks are in the credit cycle."
While he is not expecting major negative developments, the manager said he is prepared to "react quickly" if they come along.
Besides stable rates and low inflation, merger activity is driving the bank stocks, Mr. Stribley noted, prompting the market to view "any bank under $50 billion (in assets) as a takeover candidate."
But merger prospects do not play a large part in his investment decisions. "It is a second- or third-tier factor for us," he said. The prime consideration is that "we don't like to own banks that buy banks."
Finally, Mr. Stribley said he feels an overall pullback in stocks is possible. "The market could correct 10% at this point," he said, but banks, with cheaper stocks and good prospects, might well be able to hang onto their current valuations.