Money managers are taking advantage of the recent selloff in bank stocks to add J.P. Morgan & Co., Banc One Corp., and other quality names to their portfolios.
"Why sell now?" asked David Dreman, head of Dreman Value Management in Jersey City, a major investor in bank stocks. "As long as the fundamentals of the industry are good, there's no reason to. And the fundamentals are excellent."
Mr. Dreman and some other money managers expect the bull market to come roaring back. To them, the selloff means a chance to snap up shares of some banking companies at low prices.
Worries about the economy have caused other investors to turn cold on the industry, which they had marked as the sector most likely to take advantage of a recovery.
The long bull market gave investors plenty of room to take profits and seek better bets elsewhere, including what may be the next hot sector, the food industry.
"It's the old |sector rotation,'" said Miles Seifert, head of Gray, Seifert, a New York money manager. "Bank stocks did well because interest rates were coming down."
Now, interest rates, particularly the key federal funds rate, cannot come down much further, which means that banks' cost of funds is more likely to rise than to fall. That could eat into profits. So investors are seeking greener pastures.
Even Bulls Subdued
The economic jitters struck even among the bulls who are buying shares of the high-quality banks that were shunned earlier this year.
"Early this year, there was a shift to the poorest credit-quality banks," said James Goff of Janus Capital Corp. "Everyone bought banks like Citicorp, and banks like Morgan and Wachovia were hit because of that. Now, there's some shift back to the higher-quality ones."
For example, Janus recently bought share of Banc One, which was agreed to acquire Affiliated Bancshares. Affiliated, like Janus, is located in Denver. The purchase gave Janus a chance to look at Banc One's operations and the changes that it plans for Affiliated.
Janus was impressed with Banc One's ability to boost profits at acquired banks not just through cost-cutting but also by increasing revenues.
Leg Up for Acquisitions
The Columbus, Ohio-based superregional gives its acquired banks a much broader product line and much better computer systems. It is a formula that has worked in the past and will continue to give the company a high return on assets, Mr. Goff said.
"The stock is somewhat out of favor now," he said. "But it is the Cadillac of the industry."
Banc One was trading at $43.25 a share in late-day trading Friday, unchanged from Thursday's close.
The latest addition to Mr. Dreman's portfolio is another out-of-favor name, J.P. Morgan
The company had the least to gain from an economic recovery and was therefore among the worst-performing bank stocks in 1991. The low price was one reason Mr. Dreman bought a stake recently. Morgan's shares were selling at $60.375 Friday afternoon, unchanged on the day. That's nine times trailing four-quarter earnings, one of the lowest multiples for a major bank.
Alluring Takeover Targets
"However many times can you buy Morgan at a discount to other bank stocks?" asked Mr. Dreman, who also owns shares of Bankers Trust New York Corp., another money-center bank with a low multiple.
Takeover targets are also attracting investors.
The best place to look is states where consolidation has not yet begun, such as Alabama, Mississippi, and Virginia.
"It doesn't take too much brains to figure out that Alabama banks trade at lower multiples than a NationsBank or Wachovia," said Mr. Seifert of Gray, Seifert. "They show better earnings growth, higher dividend yields, and have the chance of being taken over."
Mr. Seifert, who concentrates on small regional banks, owns shares of First Alabama Bancshares and AmSouth Bancorp. And he's been buying West One Bancorp, Boise, Idaho, which some see as a prime takeover candidate.
Top bank stock picks among money managersDavid Dreman * First UnionDreman Value * Fleet FinancialManagement * PNC FinancialJersey City Latest buy: * J.P. MorganJames Goff * First Union
Janus Capital * BankAmericaDenver * NationsBank Latest buy: * Banc One
Miles Seifert * First AlabamaGray Seifert * AmSouthNew York * Marshall & Ilsley Latest buy: * West One