Dueling Fools: Washington Mutual Bear

If I were to close out a $10,000 long position in Washington Mutual (NYSE:WM) that I had established in September, my shares would today be worth $10,000. The problem is that I was referring to September of 2001.

That's right: Dividends aside, Washington Mutual's stock is worth about what it was worth six years ago. It hardly moves. So, basically, I could have achieved the same result over that time frame, with less risk involved, by simply placing that money into a CD.

Don't get me wrong. Washington Mutual itself is a great company, and its dividend yield of 6.2% is very attractive. However, if capital appreciation is what you're after, this is not a stock that's going to help you achieve that goal. Here's why.

Wrong sector
Not only must investors choose good companies, but they also need to invest in leading sectors. And the financials sector as a whole has not exactly been a champion performer thus far in 2007. The outlook continues to look grim, too. In fact, bears who have taken their sentiment to the market have done quite well recently on this sector. For example, shares of the ProShares UltraShort Financials (AMEX:SKF) exchange-traded fund, which corresponds to twice the inverse of the daily performance of the Dow Jones U.S. Financials Index, have appreciated 8% in just the past four months.

The deterioration is readily apparent from looking at the recent happenings at some of Washington Mutual's competitors. On Monday, Citigroup (NYSE:C), feeling the pinch of its subprime-mortgage exposure, said it expected its third-quarter profits to drop 60% versus a year ago. Also on Monday, UBS (NYSE:UBS) said it will take a third-quarter hit of $3.4 billion from the subprime crisis and will be canning 1,500 employees. Last month, HSBC (NYSE:HBC) took an $880 million accounting hit to close one of its subprime businesses and passed out 750 pink slips in the process.

Adding to the industry's mounting problems are a slumping housing market and credit card debt taken to levels that have left more and more consumers in dire financial straits. The trend that we see across the board for these financial institutions demonstrates that no company in this sector right now is immune to the effects of these recent events.

Wrong time
Not only is Washington Mutual in the wrong sector, but now would also be the wrong time to invest in the stock itself. The company has handed out 1,000 walking papers of its own, affecting not only its subprime-lending unit but also its wholesale banking operations. The "near perfect storm" that hit the mortgage industry has already led Washington Mutual to increase its reserves for loan losses to as much as $2.2 billion. This estimate comes just months after the figure was estimated to be "only" in the range of $1.5 billion to $1.7 billion.

The company did experience a 16% year-over-year increase in its second-quarter earnings per share, but the quality of its receivables has seemingly deteriorated, given the likelihood of increased credit card delinquencies in a soft housing market. For its second quarter, the company's home-loans business segment, continuing to run in the red, shaved $37 million off the company's bottom line.

The path ahead is not going to get any easier. In August, Washington Mutual noted in its 10-Q: "The Company's liquidity may be affected by an inability to access the capital markets or by unforeseen demands on cash. This situation may arise due to circumstances beyond the Company's control, such as a general market disruption." That statement alone doesn't really compel me to run out and buy shares of the stock. And to add salt to the wounds, it's already been reported that mortgage application volume in the industry declined by 2.8% during the week ended Sept. 21.

The bottom line
There's no doubt that Washington Mutual is a good company with a good dividend yield. But in terms of an investment, it's simply in the wrong sector at the wrong time.