Winners in 1991, Financial Services Stocks May Repeat
Health care stocks got most of the attention last year for their huge price gains, but right behind them--yet largely unsung--were financial services stocks.
If you’re hunting for a market sector with good potential in 1992--and still reasonable prices--financial issues such as banks, insurers and brokerages may continue to make sense.
In 1991, these stocks began to rocket as interest rates fell and as Wall Street hunted for survivors among the financial system’s wreckage.
Small investors could play this market niche via a handful of stock mutual funds that specialize in financial stocks. The average fund in that group shot up 61% last year, versus a 36% gain for the typical general stock fund. The only fund sector that performed better than the financial services funds was health care, up 74% on average.
The appeal of financial services stocks now is that many still are cheap relative to earnings per share. Because the stocks were so ridiculously depressed in 1990--when Wall Street seemed to believe that nearly every bank and insurer was headed for insolvency--many mutual fund managers who target these stocks believe that their prices still are playing catch-up.
“They really haven’t run away like some people think they have,” says James Schmidt, manager of the Freedom Regional Bank stock fund in Boston.
The average bank stock in his $52-million portfolio, for example, is priced at 9.2 times estimated 1992 earnings per share. In contrast, the stock market’s overall price-to-earnings ratio on estimated 1992 earnings is about 18, using the Standard & Poor’s 500 stock index, Schmidt says.
Financial services stocks almost always sell for lower price-to-earnings ratios than the market as a whole--but not this low, Schmidt argues. That’s a big part of the catch-up argument: As other stocks appear increasingly pricey in this bull market, Schmidt believes that more investors will come back to cheap-looking bank stocks.
What about the fundamentals? Good news there too: Troubled loans appear to be stabilizing at many banks after the ravaging losses of 1990 and 1991. On Monday, Chase Manhattan Corp. and PNC Financial Corp., two big Eastern banking firms, reported better-than-expected fourth-quarter earnings.
And though giant Citicorp on Monday forecast a fourth-quarter loss, Wall Street apparently believes that Citi too is on the mend: Its stock shot up $1.50 Monday and $1 on Tuesday, closing at $13.
Schmidt, whose portfolio is heavily concentrated in Midwest and Rocky Mountain banks such as Mercantile Bancorp in St. Louis and Zions Bancorp in Utah, expects their earnings to be up only slightly this year from 1991 levels because of weak loan demand. Nonetheless, he believes, investors will continue to jump into the stocks, lured by cheap prices and long-term optimism.
What’s more, even if market interest rates begin to rise at some point in 1992, it could be a positive for banks even if it’s a negative for most stocks, Schmidt says--because rising rates would be a sign of a stronger economy, which would boost bank loan growth over time.
Likewise, Allan Fulkerson sees great room for insurance stocks to rise further. Fulkerson’s $160-million Century Shares Trust in Boston is about 90% invested in insurance stocks, mainly in such giants as Chubb Corp., Torchmark and American General. Many of the stocks were beaten up at the depths of the recession, and Wall Street remains worried about an S&L-style; disaster in the insurance business.
But Fulkerson, whose conservative fund never owned such bombs as First Executive or First Capital Holdings, insists that there is no doubt about who the insurance industry survivors will be--and that over time more investors will come to realize that. While his fund takes more of a tortoise approach to investing--it was up 32% last year--his long-term performance is strong: In the 10 years ended Dec. 31, the Century Shares fund was up 346%, versus 310% for the average general stock fund.
If you aren’t convinced that the banks or insurers have enough to offer in 1992, the Denver-based Financial Funds Financial Services stock fund takes another tack: Portfolio manager Phil Dubuque has skewed his portfolio in favor of specialty financial companies--such as mortgage financiers Federal National Mortgage and Countrywide Credit, California commercial finance firm Foothill Group and student-loan financier Student Loan Marketing.
While Dubuque steered his fund to a 74% gain last year with the help of bank and brokerage stocks, the specialty firms now look much more appealing, he says. The big attraction: They’re all in growth markets, and they’re gaining market share at the expense of weaker competitors.
Financial Stock Funds These four stock mutual funds concentrate on stocks of financial services companies, such as banks, brokerages and insurers. Ask about sales fees before you buy any fund.
Fund/ phone number: Century Shares Trust (800) 321-1928 Minimum investment: $500 Total return: 5 yrs.: +83% Total return: 1991: +32% Fund/ phone number: Fidelity Select Regional Banks (800) 544-8888 Minimum investment: $2,500 Total return: 5 yrs.: +103% Total return: 1991: +66% Fund/ phone number: Financial Funds Fin. Services (800) 525-8085 Minimum investment: $250 Total return: 5 yrs.: +131% Total return: 1991: +74% Fund/ phone number: Freedom Funds Regional Banks (800) 225-6258 Minimum investment: $1,000 Total return: 5 yrs.: +98% Total return: 1991: +64% Fund/ phone number: Average general stock fund Total return: 5 yrs.: +85% Total return: 1991: +36%
