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NEW YORK (
TheStreet) -- Bank stock investors face a more difficult task in making picks, with the industry recovery entering a late stage.
Oppenheimer analyst Terry McEvoy in his second-quarter "Wrap-Up" for the top 100 regional banks on Sunday wrote "While we would acknowledge that valuations appear a bit stretched, we still see value in certain stocks," and named seven picks his firm considered undervalued.
KBW Bank Index(I:BKX) closed at 65.98 Friday, rising 29% this year, following a 30% during 2012. That's way ahead of the
S&P 500(SPX.X), which was up 19% year-to-date, following a return of 13% last year.
Profitability for financial companies has "only just recovered to prior peak levels," according to Deutsche Bank market strategist David Bianco, who in a note to clients on Friday added "We think Financials profits growth is now limited until loan growth is much stronger and short term rates rise."
Investors this week are focused on the meeting of the Federal Open Market Committee on Tuesday and Wednesday, after which the FOMC will publish a statement on
Federal Reserve monetary policy. The committee may sharpen the language describing the eventual reduction in monthly long-term securities purchases by the central bank, but the rise in long-term rates over the past few months hasn't done much to improve banks' net interest margins. What the banks need is a parallel rise in short-term and long-term rates, which won't be brought about until the Fed raises its target short-term federal funds rate from its current range of zero to 0.25%.
And few economists expect that to happen any time soon. The FOMC has repeatedly said its goal was to wait on raising short-term rates until the national unemployment rate dropped below 6.5%. The unemployment rate was 7.6% in July. Investors will be eager to see if job growth picks up, in the Labor Department's nonfarm payrolls report on Friday.
So where do you go if you're trying to pick a bank stock right now?
For starters, if you have very long-term horizons, you may be willing to pay a relatively high price for a consistent track record of strong earnings through thick and thin.