Don't Bank on a Bottom

David Ritter, an analyst at Argus Research, who rates Merrill a buy, says the firm's shares are undervalued.

"While Merrill has significant remaining exposure to problem assets, a sum-of-parts analyst indicates that [Merrill] shares are currently undervalued," he wrote in a note Monday. "While we expect the [Merrill] shares to be more volatile than usual over the next several months, we believe that the risk-reward balance is quite favorable."

Still Ritter cut his 12-month target stock price by $10 to $60 in the note. Shares closed up 7.1% to $48.09 on Thursday, but the stock is down by half from a year earlier.

"We believe that [Merrill] shares have been oversold in the wake of the company's recent asset writedowns, which were larger than expected," Ritter adds. "Given the current state of the mortgage markets, we believe that further writedowns are likely. ... However, we believe that this negative news is already discounted in the share price."

Spotting a Bottom

Of course, the question on everyone's mind is, if bank stocks haven't yet hit bottom, when will they? While the exact time frame cannot be pinpointed, observers say it's all in the tracking of problem loans and to look for a slowing in the rate of growth for nonperforming assets.

Bank stocks typically bottom when net charge-offs are peaking -- which is after non-performing assets peak, says Mark Fitzgibbon, the director of research at Sandler O'Neill & Partners, which also specializes in banks and brokerages.

And he is not alone in having an opinion on the subject.

Unfortunately, "we're nowhere near it yet," Fitzgibbon says.