Novice Investing - Did you See Panic Now?

Date: Thursday 07th 2008f August 2008 01:40:42 PM

Did you See Panic Now? - 11/20/2007

By: Hari Wibowo

Buying an investment in a panic would give you enormous return. The problem is that things get so much worse that you would be held from buying back the stocks during this panicky period. With that in mind, I feel that we have two financial stocks that might display a characteristic of a panic. One is: Countrywide Financial Corp. (CFC) and another one is: Washington Mutual Inc. (WM). We have featured these companies along with Netflix back in July 2007 as possible investments. (we do not consider Netflix at this time as it has risen significantly since our last writing). During the past year, Countrywide shares has plunged 80% , Washington Mutual = - 63%. Panic? Definitely. Time to look at these shares.

So, how should we proceed with these two financials? Both companies are heavily exposed to the housing market by making mortgage loans and the like. Washington Mutual is only slightly less exposed with 4 % of total loans tied to the credit card market from its previous purchase of Providian. Other than that, both companies seems to be on the same boat. With mortgage volume plunging each month, including for the week ending in November 23th. Mortgage application volume fell 4.3%, while refinance volume plunges 15%. That is the grim part. How about the positive side?

For Countrywide, after its first blowup back in August, it has switched its loan structure with a significant cut in subprime loan. Meanwhile, loan origination in October is 4% better than September. Also, you can look at EPS and Dividend trend for both Countrywide and Washington Mutual.

WM
Year	2001	2002	2003	2004	2005	2006
EPS ($/sh)	3.67	3.94	4.11	2.76	3.69	3.19
Dividend	0.90	1.06	1.40	1.74	1.90	2.06
CFC
Year	2001	2002	2003	2004	2005	2006
EPS ($/sh)	0.97	1.62	4.18	3.63	4.11	4.30
Dividend	0.07	0.12	0.15	0.37	0.59	0.60

Looking at the past trends for these companies, they increase their earnings consistently from 2001 onwards. A small dip occur in 2004 but dividend has consistently been raised by up to 128% at Washington Mutual and 757% for Countrywide Financials. Make no mistake. At current circumstances, it would be best for these companies to preserve some cash by cutting the dividend. However, assuming a 50% dividend cut of both companies, still leave their dividend rate the same as six years ago.

That does not mean both companies are a buy right now. Honestly, their circumstances may be precarious. But Washington Mutual with 12% dividend yield currently, looks a more tempting buy right now. Suppose that they cut the dividend in half, it still gives you 6% dividend yield. Looking at its Earning per share (EPS), the situation is bad right now and forecasting a 4 30 per share of EPS for year 2008 and beyond is ridiculous. How about a more realistic $ 1.80 per share? My estimation (don't ask how) is that Washington Mutual will get there in 2009 and increase its earnings afterwards. For 2007 and 2008 EPS, don't expect much from these companies yet. Countrywide Financials may even report a loss for the entire 2008. Anyway, that is what its current price indicates.

END

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Disclaimer: The sole purpose of this article is educational. This article is merely the opinion of the writer and is not in any way a buy/sell recommendation regarding Washington Mutual Inc. (WM) or any other securities.

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