WaMu: WSJ Backs Up My Sell Recommendation

Last November, we warned investors to Sell or avoid Washington Mutual (WM). We are reissuing our Sell recommendation today.

The issue then was directors and executives changing the benefits rules to protect executive wealth at the same time that shareholder wealth was melting due to bad lending decisions by management — reward for failure and subordination of owner’s interests to management’s interests.

We received may angry comments, mostly in courageously anonymous form, but none with counter arguments — just anger.

Well, they are at it again. This time, though, we will support our reiterated Sell with an extract from yesterday's (March 5, 2008) Wall Street Journal.

The board of Washington Mutual Inc. has set compensation targets for top executives that will exclude some costs tied to mortgage losses and foreclosures when cash bonuses are calculated this year.

The move, approved last week and disclosed in a securities filing late Monday, essentially shields the pay of chairman and chief executive of the thrift, Kerry Killinger, and more than 100 other executives from the continuing mortgage fallout.

The new formula angered some WaMu investors, who have seen the value of their holdings shrivel as the thrift’s mortgage troubles worsened. In the past year, WaMu’s share price has tumbled about 70% — to where it was about 12 years ago. … ‘They’ve cost their shareholders a lot of money,’ said David Dreman, chairman of Dreman Value Management LLC, which holds 27.9 million WaMu shares. ‘Bonuses should be given to the executives who enhance shareholder value, not destroy it.’

In a research report, Frederick Cannon, an analyst with Keefe, Bruyette & Woods, expressed concern that the cash-bonus formula ‘could result in executive focus away from issues, particularly credit management, that we feel are critical to the success’ …

We recommend investing in companies which demonstrate a corporate commitment to building shareholder value that is at least as important to management and directors as building executive wealth. Washington Mutual doesn’t cut the mustard in our opinion. Sell WaMu.

Comments

[DSX Lover:]

You won't have to worry about current executives being compensated by the end of the year. With a current $10.2 Billion Market Cap, WAMU will can be taken over with a 100% premium at 80% of Book Value. Look for JPM, or HSBC to get them at a huge bargain. Also ING and Barclays have had stellar results and both of them have excess capital.
WAMU is so large that It won't be let go out of Business by the FED. It is a horribly run company, but with $324 Billion in assets, is worth a lot more with someone with cash, willing to take on the benefits of strong deposit base and future economies of scale.

2008 Mar 06 10:14 AM

[Arohan:]

I don't understand your sell rating. A stock that is trading at such a discount to its intrinsic value cannot be a sell, unless you have a reason to believe that the company will go bankrupt. As DSX Lover states, if management is an issue for a company like this, it will be replaced

Even worst companies can be a good stock buy if priced at a sufficient discount to its value. It is heartening to see institutional investors getting caught up in the sentiment of the day and not take a long term view. That means it is still possible to get market beating returns for a savvy investor

2008 Mar 06 10:56 AM

[kurt walter:]

WAMU management is horrible. It has been horrible for many years. The boom in real estate hid that fact. The downturn proves it. With all the bad loans who knows what book value really is for this dog. A gambler might be able to trade this stock in the short term. But the long term is very murky.

2008 Mar 06 12:42 PM

[Leandropucci:]

..and where is the board of directors acting to replace these folks?

2008 Mar 06 02:11 PM

[DSX Lover:]

Traded at $10 today 50% below Book Value. It is not going to Zero, too cheap, this is not a THORNBURGH, and with the Huge Premiums on PUTS i will be writing naked Puts against this name, Jan 09 and LEAPS.
STrike $15, collect fees and income. It can't go down to 0 with $24 Billion in Capital, even if it takes $14 Billion (4.5% of assets) in Write Offs still has over $10 Billion in Capital, just slightly above Book Value where it traded today. When it reached $10 today the Bears were running for cover. If it hits $10 again BUY BUY BUY!!!!!!!!!! Huge PAYOFF Its time to get on Bullish with these FINANCIALS.

2008 Mar 07 04:52 PM

[shorty:]

Is it still a god time to short this stock or is it too risky at this point?

2008 Mar 08 10:51 AM

[Fat Arby:]

shorty

in troubled times, it's never too late to maintain the trend. Just keep in mind that bull rallies can scare you into taking a loss. Keep reading the news for any major developments in WAMU like mergers, buyouts, etc... but until economic conditions improve there is no reason why buyers will be greater than sellers. I hit myself in the head for having sold my 19 puts too soon then my 16 puts at 12. If only I had had a bit more patience I would have doubled my profits or more.
tHE bigger question is why? why would a bank with such a large market cap and so many outlets lose so much value in such a short period of time. What hapenned? These are the underlying philosophical tenets which you have to get to know first; then, look at the technicals and choose an entry point.
The thing might very well rally past 11, but keeping it above resistance at 12 is a tricky thing.
Honestly, if I had 1000 spare bucks I would short it; Better yet, I'd wait until march 26-28 and catch the price action. If it looks really weak, then given the continuing erosion in financials it will likely fall further. The long put, strike of 9 dollars, closed today at ask of 155 dollars. If you wanted to buy, say, two puts, you could buy one tomorrow right at the open and then wait a week or two and see if you can't find that put cheaper , say, 100 or less dollars.
Is late march/early april going to send this market up again past 11900? Naw... The international scene is bleak, and China is beginning to look really bearish, so it's a good bet , imhop.


S

2008 Mar 11 01:22 AM