When's the worst time to raise money? Well, of course, when you desperately need it.
That's the predicament for Washington Mutual Inc. (NYSE: WM), which needs to shore up its beleaguered balance sheet. Rejecting a buyout offer from JPMorgan (NYSE: JPM) for $8 per share, WaMu has instead opted for a $7 billion capital infusion from an investor group that includes private equity maestros, TPG.
Unfortunately, the deal is extremely dilutive. In fact, a Goldman Sachs (NYSE: GS) analyst -- James Fotheringham -- thinks that investors should actually short the common stock of WaMu and buy the company's bonds.
It's a bold call -- but seems to make sense. The capital infusion should be a back-stop on the bonds. At the same time, there is likely to be more problems in WaMu's core business, as the economy continues its sluggish ways.
Simply put, Fotheringham thinks that WaMu shares should trade at its tangible equity value, which is estimated at $9.84 per share. Plus, he thinks there will need to be about $14 billion set aside for charges on bad loans. Oh, and profits aren't likely to come until 2010, which is an eternity for equity investors.
However, for individual investors, it can be quite risky to short stock. In other words, perhaps the best policy is to stay clear for awhile on WaMu.
Tom Taulli is the author of various books, including The Complete M&A Handbook
Entrepreneur's Journal: Key steps for telesales success
The week in preview: Focus returns to earnings: Alcoa, Chevron, Family Dollar
Comfort Zone Investing: Survival of the fittest -- letting some banks fail
Reader Comments (Page 1 of 1)
4-12-2008 @ 6:28PM
shaun said...
I'm all for shorting WM. It has been in a strong downtrend. I would be a little consered by how far it has already fallen, but I am certainly not bullish here.
http://www.stocks-simplified.com
4-12-2008 @ 11:28PM
thebigkill said...
I agree the dilution is horrible, although there's not enough downside support for a low risk/high reward to short.
Shorting to win a buck per share, when some blow-hards might foolishly buy thinking WM's inflated, overvalued P/E is cheap?? That play's over. The GRMN's and CROX's of the world are still worth a good look to short, but not WM at these levels.
The company's solvent. There's no real reason to short, people will sell off slowly over the next few months once investors wake up to see the stock price is dead money for years.
On a completely different, generous note... natural gas. D.Y.K. oil prices grew 1000% between 1965-1980? It was a tidily strong commodities bull market met by then growing power USA, a lil similar to China's growing global status and hungry demand to build a fully developed nation.
No more macroeconomic hints...hope you enjoy a sensational Spring Sunday!
4-17-2008 @ 2:38AM
joe said...
Wal Mu got away with poor banking practices for years. Poor costumer service, just awful loan servicing. They treated costumers so poorly, I can't see how they will get good will not only to recoup costumers in a down economy but to get other loans they will need to stay open. Have you looked at Cascade Bank. Small but very efficient.