WaMu: Speculative Value Play

At Friday's closing price of 4.05, Washington Mutual (WM) is attractive as a speculative value play, based on a price to tangible book ratio of .32 and a Price to Normalized Earnings of 1.8.  For many years WaMu was popular with institutional investors and traded in a range of 35-45 per share before plunging to under 4 this year. The signs of trouble were there – the mortgage operation experienced difficulties starting in 2004, when the housing bubble was in full bloom, and promised corrective actions never resulted in expense reductions or meaningful improvements in the troubled segment.

Confronted with an impending capital crisis, WM raised capital in April, at the expense of considerable dilution to existing shareholders, from  private equity firm TPG.  Their buy in occurred at 8.75, so at today's price the small retail investor can outwit the smart money, paying less than half of what TPG paid.  Admittedly smart money has had trouble in financials recently, witness Warburg Pincus paying 31 per share for MBIA (MBI).  However, it is always good to pay less than the smart money paid. Also, private equity normally does due diligence before getting involved, so the investor who comes in later has the implied value of an impartial outside review.