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Stock Analyst Update

Bank Stocks Cash In on a Little March Madness

But the Fed may dampen investors' enthusiasm Tuesday.

After shunning the banking sector for nearly nine months, investors couldn't get enough of the industry Thursday and pushed the group up almost 10%. But this attraction may simply be spring-time flirting, not a full-blown love affair.

To be sure, most well-run banking companies are undervalued. They have consistently posted double-digit increases in earnings, and losses associated with bad loans have been few. Many companies, including Citigroup (C) and FleetBoston Financial (FBF), are expected to beat analysts' consensus earnings estimates when they release first-quarter results in mid-April. Yet the average price/earnings ratio for the banking industry is 14--less than half the average P/E ratio for S&P 500 stocks. In short, these bank shares look cheap.

Nevertheless, the main factor that had tainted investors' view of the banks--rising interest rates--hasn't gone away. In fact, the Federal Reserve is expected to raise interest rates for the second time this year when it meets Tuesday. That expected news should already be priced into the bank stocks; however, a rate hike may send investors scurrying out of the industry as fast as they came in Thursday.

With bank stocks on sale, now may be an excellent time for long-term investors to buy into the group. But be prepared for volatility: The ride may be very bumpy in the coming months.