Good news on inflation Friday ignited what some money managers said is the start of a new bank stock rally.
"We are forecasting a powerful rally in bank stocks," said Sam A. Marchese, executive vice president of SIFE Trust Fund, Walnut Creek, Calif.
On Friday the American Banker index of bank stocks rose 1.7%, versus a 0.4% increase in the Dow Jones industrial average.
The moderate increase in producer prices in May bolstered money managers' confidence that the Federal Reserve will not tighten credit, boding well for bank profits.
Investors Can Relax
"The respite from worries about bank earnings should let investors relax and get back into the sector," said Edwin Walczak, chief investment officer for Vontobel U.S.A, a unit of Switzerland's Bank Vontobel.
Since mid-April, rate worries have sparked a selloff in bank shares. Some bank stocks are down 20% from yearend; in some cases, gains for the year have been wiped out.
Money managers believe that the stocks can rise sharply from those low points.
"A lot of these stocks have a 20% to 30% upside," said Mr. Walczak.
Some analysts, however, caution that it is premature to expect a bank rally before the full inflation tale is told. The consumer price report, due out Tuesday, will tell the second, and maybe more important, part of the story.
"Today's PPI number helps the stocks to bounce," said Raphael Soifer, an analyst with Brown Brothers Harriman & Co. "But investors want to see confirmation on Tuesday."
Bank stocks moved higher on Friday, though some market watchers had expected a stronger performance.
|Their Chance to Pop'
"Bank stocks have been on a downturn for two months, and this was their chance to pop," said George Salem of Prudential Securities Inc. "They moved, but they didn't explode."
Leading the bank stocks was BankAmerica Corp., which jumped $1.375 to close at $43.75. Banc One Corp. gained $1.125 to $52.125. Chemical Banking Corp.'s shares also gained $1.125 to close at $38.25. And First Union Corp. shares rose $1.375 to close at $44.25.
The Dow Jones industrial average gained 13.69 points to 3,505.01.
Chase Manhattan Corp.'s shares were the most active Big Board issue, with five million shares traded. Chase issued 22 million shares on Thursday.
Says Selectivity Isn't Critical
Money managers think the price fall in bank shares was steep enough to attract investors, especially considering potential gains in per-share earnings.
The top picks from money managers include stocks that fell the farthest. Mr. Walczak said that there are so many cheap bank stocks around that selectivity is not critical. He started buying in during the selloff, after getting rid of most of his bank share holdings in January.
BankAmerica is one of his top picks. The shares have been controversial because the weak California economy raised doubts about the company's ability to increase earnings. Said Mr. Walczak: "It's cheap enough not to worry about that."
Comerica Inc., another of his top picks, is a similar story. The shares have fallen from a recent high of $35.25 to around $28.
Mr. Marchese said his SIFE Fund - which predicted that bank stocks would fall in May - bought $25 million in bank stocks in the past six weeks.
One of the stocks his fund bought was First Union. Some money managers liked it even when it was trading at a recent high of $53. Now, at about $42, it looks really cheap to Mr. Marchese. "Even if it recovers half of what it lost, it is a good deal," he said.
Tucker Andersen, portfolio manager with Cumberland Associates, said he used the selloff to add to his positions.
"I didn't stop being optimistic on the sector," he said.