Wachovia: Waiting for a New Entry Point

I wrote not too long about about buying Wachovia (WB). I got in just under $17, thinking that the worst of the carnage was over. If you followed me, you followed me off a cliff. Hitting an intraday low of $7.80 on July 15, it was a pretty awful call.

Luckily, it had an extremely speedy recovery, getting back into the $18 range earlier this week. Seeing that this was an unbelieveably aggressive move up for any stock, and that the indices for banks in general had jumped historical leaps in just a handful of days, the writing was on the wall that at least for the short term the way forward was down. So I took the opportunity to cash out for a very small profit and look for a new, much lower entry point.

Well goody for me. Now to the point: the fact is that this is not the first time I have completely missed calling a bottom in a troubled financial. I missed massively on AIG and on Citi as well. So how did I miss so badly on these two and yet hit so perfectly on Countrywide? One word: patience. I started watching Countrywide (CFC) for a buy opportunity right after BofA (BAC) bought in at $18. But I never saw the opportunity literally until the day I bought it at less than $4.50. And even then it was speculative, but I figured the fall from $4.50 to $0 isn’t too far so it was worth a chance.

So goes Wachovia and Citi (C) and AIG (AIG). These stocks have put in new bottoms substantially lower than what I thought possible, so there is new opportunity to trade them. But this is going to require substantial patience and the ability to say no if conditions aren’t exactly what they should be.

I am still unsure on how to play Citi and AIG, or whether to play them at all. But with Wachovia, I think the chaos made clear the potential opportunity. On Friday, Wachovia again got smacked with a downgrade, so perhaps it will run all the way down again, and I am waiting for the new entry point. For me, if it gets under $10, I will take another look at it, with the notion that if bumps up a few bucks I will take a profit, and if it goes below $8 I know to get clear and reset. 

For long term investors, Wachovia may languish for a while, but it’s not going under. If anything, there are a number of majors with the wherewithal and the room under the deposit cap who would love to have Wachovia’s footprint (think JPM Chase). So if it approaches that 52 week low again, it’s worth a look.

As for Wachovia’s new CEO Robert Steel buying 1 million shares at $16? In the short term, this is going to work out to be about as brilliant a move as BofA investing in Countrywide at $18. Take my personal experience here, and for heaven’s sake, do not use that price as the measure of a good price to get in. The opportunity will come much lower than $16, trust me.

Alas, I do not think Robert Steel a fool. And while yes, this purchase serves as a vote of confidence in the company he is running, I also believe he sees from the inside that he can right this ship and expects that his investment will pay him back handsomely. And with patience, you can do even better.

Finally, you long term investors just remember the most important thing, which is the thing that I forgot and barely escaped getting burned: that what started this whole mess for these institutions is the housing crisis. And until that improves, the financial condition of these institutions won’t improve either. Be mindful of where we are overall in working off housing inventory and writing down losses related to housing. Only when this resolves will these stocks become something less than highly speculative.

Disclosure: As of publication I am have no position in the stocks mentioned here, but positions can change at any time.

Comments

[1worldcurrency:]

You moron didn't you read that Wachovia requires its CEO to hold 5 times his base salary in stock?

Not a word in this whole article about fundamental earnings, non-perfoming loans, etc. Bad joke.

2008 Jul 28 04:53 AM

[hunter:]

to squashnut-you idiot 5 times his base salary is 5 million NOT 16 million which he paid for the 1 million shares. Mr Steel will lead Wachovia back.

2008 Jul 28 08:14 AM

[Jimmy Lathrop:]

I think what the author is suggesting is that you should invest in bank stocks as merger arbitrage, on the hope that maybe a bigger bank will buy the assets when they fail, as opposed to falling into receivership and ending up with a total loss.

A safer bet would be driving to Las Vegas and laying down money, pre-season, on which team would win the Superbowl based on the team's colors matching the most attractive barmaid's eyes.

2008 Jul 28 08:17 AM

[valueinvest...:]

I love the concept that $4.50 to zero is not a long way to fall. If you put an equal amount into two stocks and one goes from $4.50 to zero and the other goes from $40 to $10 you are still better off in the $40 to $10 one even though it dropped by $30.

2008 Jul 28 10:47 AM

[Muzie:]

Synopsis of article:

"I called the bottom three times and failed lamentaly three times. Oh well. But trust me, I'm good at calling bottoms.

Since I refuse to accept I may not know jack shit about what I'm doing, let me call another 4th bottom and have the arrogance to actually give that advice publicly so that other suckers may join in on my mistakes."

2008 Jul 28 01:00 PM

[sliman:]

Bank will bust before financials turn

2008 Jul 28 01:22 PM

[noretention:]

Wachovia and its new CEO = more of the same...lots of PR spin and much-o more RE losses to come.

2008 Jul 28 01:23 PM

[fla10000:]

We might have some answers about cost cutting by this time tomorrow. Rumor has it that the old World Savings mortgage employees will be out of work by Friday. So much for that 26 Billion dollar purchase. It amazes me to no end how everything bad at Wachovia was blamed on World Savings. Check out the loan losses on World Savings mortgages vs. Wachovia. Eye opening. WOW!

2008 Jul 28 03:41 PM

[muley101:]

2 words: STOP LIMIT

2008 Jul 28 10:29 PM

[investorinPA:]

If you stink at picking financials, why do you keep insisting on picking financial stocks??? Its a falling knife.

2008 Jul 29 02:37 AM

[Big Al45:]

I'd wait until the 3rd Quarter results are released before investing in this dog. Steele has no more than six months to turn things around.

If Steele can sell the bad mortgages, and get rid of the leftover executives from 1st Union, WB might survive as an independent company.

If not, somebody will take them over for less than $12 per share (in stock).

2008 Jul 29 08:19 PM

[roebull56:]

BigAl45 is on the mark. When WB is teetering on bankruptcy by year end, watch a GS come in and offer a "generous" $3.00/share. Here's a hoot, I read that, "Deutsche Bank's Mayo is even more bullish, pegging a $30 price target on Wachovia's shares.". Hah! if so why isn't WB trading at a minimum of $24/share? CEO Steele's 16 mil purchase. I wouldn't be surprised if WB "lent" him the funds. Good PR.

2008 Jul 30 12:51 PM

[nyka:]

Too many references to I I I I I I I. What was your objective in writing this piece? It sounds like you're explaining how tough it is to make money in this market. Wow, that's quite a revelation!

2008 Jul 30 06:16 PM