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Tech stocks - Thursday, July 3, 2008

Tech:stocker - Some Fourth of July Fireworks With Washington Mutual

Remember everything we said yesterday about investing in "stable staples" of consumers and small and micro caps that are less volatile? Just forget all of it as we discuss Washington Mutual (WM:NYSE), a stock that looks worse than the fools who stepped in the ring Mike Tyson's during his early fights (you can also add Evander Holyfield and his chewed up ear to the comparison). And yet, we couldn't find a better stock to provide a bigger bang after the Fourth of July and beyond.

Some people might think that the folks at tech:stocker have already started celebrating the 4th by recommending a stock that has dropped 38 points since its 52 week high to give it approximately an 88% loss in value for that timeframe. Considering most people would never buy a house again if their current one dropped 88% in value, it's no surprise people have been avoiding this stock as if it got 8 miles to the gallon and looked extremely foolish on today's highways. The reality is Washington Mutual (Wamu) is nowhere near as unwanted as a Hummer and should rebound over the next 24 months. The Hummer on the other hand will continue to receive dirty looks and scorn so sell it now while it might have some kitsch value left.

Like many other financial services companies who once profited wildly from exotic mortgages, Wamu has become another victim of the lending crisis. Having more than its fair share of exposure to the overpriced homes in California, Wamu the term "ARM" was not in its mortgage portfolio. What surprises us about Wamu is how much of a hit the value of their stock has taken versus some of their competitors.

Bank of America, who actually paid $8b to acquire Countrywide overstocked portfolio of subprime mortgages, is 58% off its 52 week high. That's quite a difference when compared to Wamu. While Bank of America is quite a bit larger and has a better-diversified revenue model, we still believe Wamu is more a victim of a sell-off versus a truly poor investment.

That's not to say Wamu has easy road to recovery and will be profitable in the third quarter. A report today released by the Office of Thrift Supervision stated that found that new foreclosures climbed to 46,249 in March from 35,780 in January. That's almost a 23% increase in two months. Until the number of foreclosures starts to decrease from month to month, we expect investors to be extremely nervous about investing in financial services companies that have significant exposure to the subprime mortgage market.

In Wamu's favor is their recent ability to raise $7.2b which will give the company enough capital to make some strategic moves that could reduce some of the losses from further eroding in the mortgage market. And we do expect further losses in the mortgage market for the rest of 2008. The earliest we expect a turnaround is in the summer of 2009.

Wamu will take another hit on Monday when the markets open as investors will remember the Office of Thrift Supervision report and will act accordingly. That will only create a better opportunity for savvy investors who understand that a little smoke leads to a great fireworks show.