Thrift stocks, usually regarded on Wall Street as poor cousins to banks, may be a better investment at this point in the interest rate cycle.

With the Federal Reserve Board expected to refrain from raising rates further at its meeting later this month, the American Banker thrift index has outperformed its index of 225 banks since mid June, and a number of analysts see that trend continuing.

"Thrifts are the most to benefit from the current macroeconomic sentiment," said Eric J. Grubelich, chief credit analyst at Keefe, Bruyette & Woods Inc. "There is increased sensitivity towards asset quality in banks' commercial loan portfolios, and commercial lending is not what thrifts are doing."

Thomas O'Donnell, an analyst at Salomon Smith Barney, said "financials [in general] will come to live again" but argued that thrifts will do better than most, because their nonperforming assets are "at record low."

Chad Yonker of Fox-Pitt, Kelton Inc. said the series of rate hikes by the Fed starting last summer compressed thrifts' margins, and that the thrifts have the most to gain as that trend reverses. "Investors will realize that and start focusing on these issues," he said.

Mr. Grubelich said that as rates have risen the thrifts - which keep more mortgage loans on their books, rather than selling them in the secondary market as bank-owned mortgage companies do - have benefited from the popularity of adjustable-rate mortgages, though the profitability of such loans is lower. Washington Mutual and Golden State Bancorp are among major thrifts with good fundamentals, he said.

In trading Thursday, Washington Mutual shares were up 12.5 cents, or 0.36%, to $34.50. Golden State shares were up 18.75 cents, or 0.91%, to $ 20.50.

Mr. O'Donnell named Golden West Financial Corp. as a "star performer." He predicted "positive earnings surprises" from the Oakland, Calif., holding company as ARMs issued in late 1998 and early 1999 at teaser rates become fully indexed. Golden West closed at $46.6875, down 6.25 cents, or 0.13%.

To be sure, analysts advise against indiscriminate buying of thrifts.

"I would not just say people should invest in thrifts," said Laurie Hunsicker, an analyst at Friedman Billings Ramsey & Co., who argues that some regional banks are as good an investment. Moreover, she noted that some thrifts, such as Bank North Group and Charter One Corp., are becoming more "bank like" to lower their funding costs, and will benefit from the general upswing of financial institutions.

David B. Moore, an analyst at Podesta & Co. said he is "not too exited about thrifts" generally. "Nine out of ten thrifts are disastrous in terms of earnings," he said.

Mr. Moore said that the recent rally on thrift shares is a "trading issue." Prices reached a low earlier this summer and with the economic situation looking good, investors jumped on the reasonably priced shares, he explained.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.