Thomas O'Donnell, an equity analyst at Citigroup Inc.'s Salomon Smith Barney unit, raised his earnings expectations for several thrift companies and government-sponsored enterprises Thursday, and he said that investors can still make money in the mortgage finance sector.

"While the easy money has been made in mortgage finance, we believe further moderate gains should be posted as companies continue to produce solid earnings," Mr. O'Donnell wrote in a research note. Falling interest rates continue to expand margins, which have again bolstered the second-quarter earnings for adjustable-rate lenders, he said.

"Investors may want to lighten up as prices in our sector rise, but to us it makes no sense to abandon the sector completely while there is more upside, albeit moderate, to come," Mr. O'Donnell wrote. They should keep a significant portion of their investments in companies that produce real earnings, he wrote.

Mr. O'Donnell increased his full-year earnings estimate for Golden West Financial Corp. in Oakland, Calif., by a nickel, to $4.70 per share, and for Washington Federal Savings and Loan in Seattle by 4 cents, to $1.96. He also raised his estimates for Fannie Mae, by 4 cents, to $5.16, and for Freddie Mac, by a penny, to $4.16.

For the second quarter, he said, he expects Golden West to report per-share earnings of $1.18, matching the analysts' consensus as compiled by First Call/Thomson Financial. He also predicts that Washington Federal will post earnings of 52 cents, a penny above the consensus; Freddie, $1.03, 2 cents above the consensus; and Fannie, $1.30, 3 cents above the consensus.

Charlotte A. Chamberlain, an analyst at Jefferies & Co. Inc. in Los Angeles, said she agrees with Mr. O'Donnell's outlook for the thrift sector but only if the overall market decline continues.

"If you are a portfolio manager, the best you hear is coming from thrifts, mortgage finance companies, housing, and defense," she said in an interview. "Everything else is dismal to disaster."

The share prices of thrifts and mortgage finance companies won't rise forever, she said, but two failed attempts to bring the technology sector back to life might make portfolio managers think twice before they sell stocks with positive earnings expectations.

Thrift stocks should continue to outperform the market, though their earnings growth may slow in the third quarter, Ms. Chamberlain said.

"Earnings at thrifts are in the late stages of expansion for this mortgage cycle," she said, because the economic slowdown will eventually reach the housing market. Profits may not get much better, but there will be no negative surprises either, particularly from the West Coast thrifts, she said.

Golden West is among Ms. Chamberlain's favorites; she expects it to report second-quarter earnings of $1.11 and full-year earnings of $4.40.

Charter One in Cleveland ranks at the bottom of her thrift list because of its exposure to manufacturing in the Midwest. Ms. Chamberlain said she expects the company to post second-quarter earnings of 58 cents and full-year profits of $2.35.

Mr. O'Donnell's second-quarter outlook for Charter One matches Ms. Chamberlain's, but he expects the company to earn $2.70 for the year because of strong demand for fixed-rate mortgages. He did not raise his earnings expectations for the stock.

First Call said the analyst consensus for the stock is 57 cents for the second quarter and $2.32 for the year.

On Thursday, Golden West's stock rose 0.14%, and Charter One fell 0.35%. The American Banker index of 225 banks ended down 1.10%, and its thrift index was up 0.19%.

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