Saying that "irrational selling" has created buying opportunities, analysts at Paine-Webber Inc. on Monday upgraded or affirmed their ratings on five bank and thrift stocks and initiated an "attractive" rating on another.
"Bank stocks have been horrible performers since third-quarter earnings were reported," said Lawrence W. Cohn, PaineWebber's money-center analyst. "But recently the pullback in the bond market seems to have run its course, and banks appear to be stabilizing."
During the three-year-old bull market, banks stocks have often traded in lockstep with the bond market.
"We see some distressed values out there in these stocks and trading opportunities developing," said Thomas D. McCandless, regional banking analyst for the firm.
The analysts upgraded Society Corp. to an "attractive" from a "neutral" rating and elevated both Bankers Trust New York Corp. and J.P. Morgan & Co. to "neutral" from "unattractive."
They affirmed "buy" recommendations on BankAmerica Corp. and Bank of New York Co. They also initiated coverage of Keycorp, which is set to merge with Society, with an "attractive" and of Union Bank, San Francisco, with a "neutral" rating.
Meanwhile, PaineWebber's thrift analyst, Gary Gordon, upgraded Golden West Financial Corp., viewed as one of the nation's best-run savings institutions, to "attractive" from "neutral." Shares of the thrift have been trading near their 1993 low.
In Monday's market, Society was up 37.5 cents to $29.50, Bankers Trust was up 37.5 cents to $76, J.P. Morgan was up $1.125 to $70.75, BankAmerica was ahead $1 to $43.625, and Bank of New York was up 37.5 cents to $55.
Keycorp rose 50 cents to $35.50, and Union Bank gained 25 cents to $28.25. Golden West slipped 25 cents to $37.75.
Mr. Cohn said he believes the quarterly trading pattern observed in bank stocks over the past five quarters will soon be apparent again. The stocks have gained ground in the quiet mid-quarter weeks, but then sold off sharply after earnings have been announced.
Mr. McCandless noted that regional bank stock prices fell a hefty 20% from early April to early June, a correction as deep as some bear markets, he said. "Then, beginning about June 8, we had four weeks of bliss when the banks that I follow rose from 10% to 12%."
Mr. McCandless said he didn't know it banking issues may be out of favor with certain investors. But excellent fundamentals at many banks, combined with bargain stock prices, call for "leaning against the wind" if necessary, he said
In particular, the stocks have "greatly overreacted" to rising short-term rates over the past two months, he said.
Mr. Cohn said he now thinks fourth-quarter earnings will come in "higher than anticipated."
November Looks Good
All the banks "tell us that October was a good month," he said. "Volumes rose, margins were generally maintained, and trading results were excellent." Except for trading activities, he believes November will be "just as good."
That may lead to upward revisions in earnings estimates during December, he said. At the same time, many banks will be raising first-quarter dividends. The two developments could prompt a rally for the stocks, he said.
Morgan's board of directors meets Dec. 8, he noted, and the dividend may be raised 12% to $2.70 annually from $2.40 now. Bankers Trust follows on Dec. 21, and may raise its payout to $3.50 from $3.12.
With earnings at these companies likely to fall next year, holders of the stocks "will get a chance to sell at modestly higher prices over the next few weeks," he said.
The Best Bets
But Mr. Cohn said his favorite stocks to buy in anticipation of the rally are BankAmerica and Bank of New York.
"Earnings estimates are much to pessimistic" for BankAmerica, he said. "If the company's revenues are turning upward in the fourth quarter, there will be a rush to raise estimates."
Bank of New York's stock, he said, may gain after a mid-December meeting for analysts, at which it will likely reveal "excellent growth" in its credit card and processing businesses.
Mr. Cohn's price target for BankAmerica next year is $60 a share, or 10 times his 1994 earnings estimate of $5.80 a share. His target for Bank of New York's stock is the mid-70s range, or 11 times his $6.85 estimate next year.
Mr. McCandless said he was initiated coverage of Keycorp partly because it was a "classic example of a distressed value in the market." The Albany, N.Y., bank's shares have been hurt since its merger with Society was announced.
Mr. Cohn said he was opening coverage on Union Bank because the company has "significant underlying earnings power." Current results are being impaired by asset quality problems, but when this situation improves "the stock could be quite attractive."