Some of last year's rising stars among financial stocks began this year with a plunge.
Southwest Bancorp of Texas fell $4.25 on Tuesday, or 9.9%, to close at $38.6875 after Stephens Inc. cut the Houston company's rating to "neutral" from "outperform." Stephens also downgraded Wells Fargo & Co. to "outperform" from its top rating of "buy." Wells' stock fell $1.75, or 3.14%, to $53.9375.
James M. Schutz and William G. Channell, the Stephens analysts responsible for the downgrades, said the two companies came down a peg mainly because their prices were too high. Last year Southwest and Wells stocks rose 27% and 37%, respectively.
"They can't go much further," Mr. Channell said.
Nevertheless, he said "we like both banks." Stephens raised its Wells target price by $7, to $62, but issued no target price for Southwest.
In the research note published Tuesday, the analysts wrote that Wells "should continue to post strong results."
The analysts also wrote that Southwest's management has done a "superb job maximizing profitability and growth in the Houston market while keeping asset quality problems virtually nonexistent."
Still, the company's "sky-high multiple" is a risk to investors, the analysts wrote. "The company's possible attractiveness as an acquisition candidate will probably not provide a cushion to price depreciation" until the shares are trading around $30."
David B. Sochol, an analyst at Legg Mason Wood Walker Inc. in Baltimore, agreed with their assessment of Southwest. Citing overvaluation, he cut the bank's rating to "buy" from "strong buy" on Dec. 15. "Everything that could go right for the bank" last year "did go right," including Southwest's strong fundamentals, large branch presence, and "better than expected loan and deposit growth," Mr. Sochol said.
In a research note he praised the management's expense control but wrote that "at the margin, some of these positive drivers will become less contributory."
The American Banker index of top 50 banks fell 1.44% in the first trading day of the year. The index of the top 225 banks dropped 3.26%.
The shellacking took place as observers continued to anticipate an interest rate cut. A few said there was talk that the cut could happen even before the next meeting of the Federal Open Market Committee, scheduled for Jan. 30.
Scott J. Brown, an economist at Raymond James & Associates Inc. in St. Petersburg, Fla., said the committee is likely to have a conference call before the meeting and could well decide to cut rates after employment numbers are released on Friday.
"Credit is still flowing, but the stock market is weakening, particularly in the technology sector," he said. The Nasdaq plunged 7.23% Tuesday.
According to Mr. Brown, Federal Reserve Chairman Alan Greenspan's belief that the technology industry is key to productivity growth, combined with the "psychological pressure" of the overall market downturn, will likely tip the balance in favor of the early cut.
John Youngdahl, an economist at Goldman, Sachs & Co., said the Fed "should be concerned" about such things as the decline announced Tuesday in the purchasing managers index. Nonetheless, "we do not assign a very high possibility to a rate cut before the meeting," he said.