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Washington Mutual Stock Pick

Wow, what a turbulent stock market we've seen over the last couple of months. There's no doubt that the market has been up and down a lot this year but if you keep the mindset that investing for the long-term is very profitable, you'll be fine. We have also decided to pick a new stock this week that we hope will help you comfortably ride out the stock market this year.

Many of you are probably familiar with Washington Mutual (a.k.a. "WaMu"). For those of you who aren't, Washington Mutual is the largest thrift in the US with its 2300 locations. The company is based out of Seattle and not only specializes in banking but also in life insurance, mortgages, and investments.

The stock's beta, a number that measures its volatility relative to the market, is only 0.5 so this means that the stock is only 1/2 as volatile as the S&P 500. This is always good news if you have a hard time stomaching wild swings in stock prices.

What I Like About This Stock

  1. Strong profit margin - It's 19.0% profit margin is well above the industry's average of 15.0%. And the profit margins have been steadily increasing.
  2. Less volatility - The stock is less prone to swings in prices so it typically stays on its long-run track.
  3. It's still pretty cheap - The stock is currently trading at a P/E of 10.0 and is trading at 8.8 times next year's earnings. The average savings and loans stock is trading at 13.3 times current earnings.
  4. Well-liked by analysts - Many analysts on Wall Street currently rate the stock as a long-term buy, with Lehman Brothers announcing today that their price target is $50.00.
  5. Strong management - The management at WaMu has been great at building shareholder value.

What I Don't Like About This Stock

  1. Identity theft case - In the year 2000, the single largest identity theft began to take place as 30,000 Americans had their credit reports tapped into. It was estimated that 500-600 Washington Mutual customers were impacted. But because the damages have yet to be determined, no one knows how big of an impact this will have. Although it'll probably be pretty small, it doesn't help the company.
  2. Interest rates - Low interest rates right now mean more mortgages but if the Fed ever starts raising rates again as they did in 1999 and 2000, I'd expect fewer mortgages originating from WaMu.

In general, I think this is a very solid long-term investment. I would look to see the company trading at about $52.00 by this time next year, which would be 12 times next year's earnings. After that, I expect to see solid 12-15% growth. Happy holidays!

 

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