Bank Stocks Become Choice of Growth-Minded Investors
Padgett, Tania, American Banker
Long considered the stock of choice among value investors, bank shares are increasingly catching the eye of growth investors.
Growth investors, sometimes known as momentum investors, typically invest in companies that have the potential to produce strong annual earnings growth on a regular basis. They often invest significantly in technology stocks.
However, market experts say that growth investors have been flocking to the banking sector as banks continue to generate double- digit earnings growth brought on by more diversified assets, consolidation, and a favorable interest rate environment.
"Bank stocks are fitting the growth scenario much more than any other stocks," said bank analyst Frank J. Barkocy of Josephthal & Co. "Typical growth stocks include blue-chip firms such as GM and IBM; however, banks are showing continued expansion in their multiples."
A. James Ellman, a portfolio manager at Chancellor LGT asset management and self-described growth stock investor, noted that banks are churning out 10% to 15% earnings growth and many boast multiples of 15 to 20 times earnings. "The S&P 500 has expected earnings growth of 6%, and it appears as if analysts are bringing down their estimates on those companies," Mr. Ellman said.
"If you are a growth stock investor and you're just starting to think about banks now," he said, "you've been living under a rock for the last year."
Banks historically have been a favorite stock of value investors who were attracted to the companies' discounted prices compared to the market. Banks have had lower price/earnings ratios than most other stocks since the 1960s because of the cyclical nature of their business, Mr. Ellman said.
"This is not to say that the business cycle has been repealed, but today, banks have done quite a bit to reduce this cyclicality in their earnings stream," he said. …