Veteran analyst Frank J. Barkocy is the latest on Wall Street to sharply revise upward his expectations for bank stocks.
"So many positive factors have changed for the group that we have reevaluated our thinking on the stocks and very conservatively raised targets on number of those we cover," he said.
Mr. Barkocy of Josephthal Lyon & Ross Inc. said he thinks banks deserve to sell at higher price-to-earnings multiples than they are trading at today because of the industry's changed dynamics.
As a group, bank stocks are still trading at a 32% discount to the Standard & Poor's 500 stock index, he said.
Mr. Barkocy recommends First Union Corp., Fleet Financial Group Inc., KeyCorp, and PNC Corp. His smaller-capitalization picks are Hubco Inc. and Chittendon Corp.
Banking issues edged lower in Wednesday's market, along with most other stocks, but several smaller banks enjoyed a big day.
New Jersey's Westwood Financial Corp. jumped 25% in value after it agreed to be purchased by Lakeview Savings Bank. Lakeview said it would give Westwood shareholders $29.25 in cash or Lakeview stock for each share held.
Westwood, with assets of $111.4 million, closed at $26.625, up $5.375.
Meanwhile, First Central of St. Petersburg, Fla., with assets of $54.7 million, is being acquired by Colonial BancGroup, Montgomery, Ala., for $22 million, or $62.46 per share.
Jay Suskind, head trader, Ryan Beck & Co. of West Orange N.J., said smaller capitalization bank stocks are charging ahead, mirroring the markets in general.
"The blue-chips are losing their luster, and all that money is going into smaller caps. The same thing is happening with banks, though the larger banks are holding up better than rest of market."
He said banks have made "a pretty good move in the last few weeks." While some "money-centers are taking a breather, the regionals are still very strong. I don't see any end in sight."
The market's letdown on Wednesday was blamed on weak foreign markets and a nervous bond market that is again anxious about inflation. Banks fared slightly worse than the general indexes.
Mr. Suskind said investors are awaiting the reading of the producer price index, due Friday. That could signal what the Federal Reserve will do about interest rates at its Sept. 30 meeting.
Mr. Suskind said he thinks the market has begun to award bank stocks the higher multiples that analysts like Mr. Barkocy are calling for. But he said it remains for banks to prove they are deserving.
"The only way that will bear out is if banks perform up to speed. If banks disappoint with earnings or over-priced mergers, then the market's been overpaying." Right now he said, "It's too early to tell."