As financial stocks got a reprieve Monday after several days of battering, investors received more mixed predictions from the experts.
Some analysts remained upbeat about names with good fundamentals, but other strategists backed away from banks, brokerages, and specialty finance companies. We believe the selloff in bank stocks represents another chance to buy these stocks, Salomon Smith Barney analysts Ruchi Madan and Keith Horowitz wrote in their weekly note.
Spooked by confusing economic and inflation data, investors pulled out of bank stocks in droves last week and dragged down a lot of good-quality companies, according to Ms. Madan and Mr. Horowitz. Bank of New York Co., for example, suffered what the analysts described as a flight from quality: After recent Fed rate cuts, investors felt safe enough to move into higher-risk even technology stocks before the broad selloff last week.
But Ms. Madan and Mr. Horowitz said that the weakness in bank stocks is a terrific buying opportunity.
Bank of New York rose 39 cents Monday, or 0.77%, to $51.10. The American Banker index of the top 50 banks rose 3%, while the index of the 225 banks rose 3.7%. The Standard & Poors 500 was up 1.75%.
However, other experts are not so gung-ho about financial stocks.
Douglas R. Cliggott, the U.S. equity strategist at J.P. Morgan Securities, recommended in a report published Monday that investors have a very limited exposure to financial stocks only 9% of their portfolio.
Investors should stay underweight in banks, specialty finance companies, brokers, and government-sponsored enterprises; market weight in life insurers; and overweight only in nonlife insurance companies, he wrote.
Despite easier monetary policy, we still believe that many financial stocks face serious earnings risk, Mr. Cliggott wrote, particularly those that are exposed to consumer credit and capital markets activity. High price-earnings multiples add to investors risks, he wrote.
Looking beyond the usual suspects, Mr. Cliggott wrote that a slowdown in the emerging markets could hurt also U.S. banks that have a high degree of international exposure.
As for brokerage firms, Mr. Cliggott wrote that he believes the sector has already made its relative price high for the year.
Adwin Walczak, the portfolio manager of the Vontobel U.S. Value Fund, is also wary. Mr. Walczak, whose fund invests mainly in property-casualty insurance stocks, said he is not inclined to use the weakness among banks stocks as an opportunity to diversify. Banks are not cheap enough to justify the risk, he said.
Richard Bookbinder, a managing partner of Bookbinder Capital Management, a fund of funds, agreed with Ms. Madan and Mr. Horowitz that some higher-quality banks may have suffered unfairly. It is hard investors to go against the general market sentiment, he said.
Credit quality will continue to dominate the markets view of banks, Mr. Bookbinder said. He said financial stocks will probably keep suffering until investors have a clearer picture of economic conditions.