The hard-hit shares of Mercury Finance Co. have gained back some ground recently amid growing murmurs on Wall Street that short-term interest rates could be near a peak.

Mercury, spun off from its banking parent five years ago, has suffered more than most other financial stocks during the Federal Reserve System's credit-tightening campaign of the past year.

From a high of $18.875 per share last June, it plunged 45% to $11.125 just before Christmas. But by last Friday it had broken through the $15 level again, closing at $15.625 per share.

Bank analyst David C. Stumpf of Wheat First Securities Inc., Richmond, Va., recently initiated coverage of the company with a "buy" rating, saying a 40% stock price gain this year is possible.

"It's just inconsistent for a company to lose nearly 45% of its market value while during the same year returning over 9% on assets and 40% on its equity," he said on Monday.

Mercury's shares still trade at over 16 times expected earnings this year, twice the average multiple of banks. But among banks, returns of 1% on assets and 15% on equity are considered strong.

"It's hard to argue with the numbers. They're about the most profitable public company around. If they didn't have the word 'finance' in their name, the stock would not have gone down in value the way it did," Mr. Stumpf said.

Mercury, based in Northbrook, Ill., focuses on loans to buyers of used cars, a specialized sphere of consumer finance generally shunned by banks because of the higher-risk borrowers involved.

But used-automobile financing activity has grown sharply in recent years as new-car prices have risen beyond the easy reach of many workers, whose incomes have stagnated.

After its 1989 spinoff from First Illinois Corp., Mercury grew rapidly. It now has receivables of $1.3 billion, with 90% of its portfolio made up of indirect auto loans. Mercury runs 247 offices in 25 states but is concentrated in Florida, Texas, and Illinois.

Mr. Stumpf feels the stock fell last year because "Mercury is the leader in the emerging industry of substandard auto finance and its stock was the most heavily owned by institutions."

"Major investors had significant profits in the stock, and as interest rates rose Mercury clearly became a sell candidate for a lot of people," he said.

Beyond rates, he reasoned that some investors had begun to worry about increasing competition from "a lot of companies that have either come public or otherwise raised capital in the past two years and are targeting this business."

They include Americredit Corp., Fort Worth; TFC Enterprises, Norfolk, Va.; Auto Finance Group, Westmont, Ill.; Credit Acceptance Corp., Southfield, Mich.; Eagle Finance Corp., Libertyville, Ill.; and Regional Acceptance Corp., Greenville, N.C.

"Clearly, with these new competitors, some people felt that Mercury's unbelievable growth rate would be in jeopardy," Mr. Stumpf said. "But the company still had a great year in 1994."

The analyst thinks Mercury can achieve a 25% growth rate in both its loan portfolio and earnings per share.

A big reason is Mercury's funding advantage. It is one of the few companies in its business with regular access to the public debt markets. Most others fund themselves with more expensive bank borrowings.

Mr. Stumpf feels Mercury is an attractively valued stock right now because its price-earnings multiple is well below its projected growth rate.

Bank stocks fell lower in Monday's market, along with most other stocks, as investors fretted that the federal government's proposed $40 billion loan guarantee program for Mexico is rapidly losing support in Congress.

The market was also beset with uncertainty about interest rates ahead of today's meeting in Washington of the Federal Open Market Committee, the unit of the Federal Reserve System that sets monetary policy. An announcement on rates is expected Wednesday.

In late afternoon trading Citicorp was off 75 cents to $40.50, Chemical Banking Corp. down 62.5 cents to $38.125, Banc One Corp. down 37.5 cents to $29.25, and Bank of New York Co. off 50 cents to $30.375 per share.

Among the relatively few bank gainers, First Interstate Bancorp, Los Angeles, was ahead 87.5 cents in late trading to $74.625 while Fifth Third Bancorp, Cincinnati, had advanced $1 to $50 per share.

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