You are not going to believe this. Check out this half-page ad running in The Wall Street Journal:
There are a lot of myths out there about investing in the stock market. The 'Leading Lipstick Indicator,' for example holds that when there's less confidence in the market, consumers turn to more affordable indulgences, like expensive lipstick. Color us skeptical. Fortunately, there are more reliable indicators to guide you. Instead of locking lips with shady theories, maybe you should look into a company that serves over 20 million consumers nationwide, and that was recently dubbed "The Bank of Middle America" by Fast Company Magazine. All of which makes this a stock that'll look good on anyone.
It's no myth. Washington Mutual is for real.
A stock that'll look good on anyone? Criminy. And on the entire back page of Sunday's New York Times business section, we find not the lipstick indicator, but the presidential cycle theory. The closer? "All of which makes this a stock that's very easy to vote for."
Hello? The nation's largest savings and loan is spending shareholder money to hype its stock?
This is not cheap. The New York Times open rate per column inch on Sundays is $1,342, with 126 column inches to a page. That's about $170,000. Of course Washington Mutual (NYSE:WM) gets a break for multiple insertions, but what kind of break is this for shareholders? I've seen at least 10 of these ads in the two publications. This is easily a seven-figure marketing campaign.
If you are a shareholder, you should be outraged.
What matters
Class, let's review, shall we? And you in the back row -- Washington Mutual managers -- come up here and sit in front. Glad to see you brought your board of directors, given that they hired you.
You've all read your homework -- The Motley Fool Manifesto -- so we'll just do a brush up. The longer the period, the more stock prices rise and fall in relation to a company's ability to create value. The shorter the period, the less connection there is between stock price and business value. That's one reason we recommend that you not invest in stocks with any money you might need in the next five years -- and even that's assuming you carefully choose stocks that offer growth at a reasonable price. If you do, there's at least a chance that over five years, price will follow value.
So why is Washington Mutual spending shareholder money in the fruitless task of moving the stock in the short term? Let's see, maybe some stock options are going to expire? Or? You see the problem? It doesn't matter whether management has a nefarious, self-interested motive, or whether this is just plain silly. Merely undertaking a wrong-headed move like this invites speculation as to motive.
And that's exactly what good management doesn't need or want. Management should follow this guide that Bill Mann picked up once: "If the roles were reversed, and you were the outsiders, what information would you want in order to make an informed investing decision?"
Spending money to hype a stock doesn't satisfy this rule. Ever.
Why bother?
What's worse is that Washington Mutual doesn't have to do it. It's a successful bank by any measure, and its stock has performed phenomenally -- just marvel at its chart. It didn't achieve these results by hyping its stock, but by building its business year in and year out to produce financials that are very good indeed.
For an update on Washington Mutual's health, I turned to my colleagues Bill Mann (TMF Otter) and Mathew Emmert (TMF Gambit) for a short course on financial institutions. Specifically, what do they like to see from a bank? Bill requires that income from investments -- interest on loans and returns when the bank invests its "float" -- exceeds fee income. Washington Mutual scores well here.
Mathew says that as a threshold, a good bank should manage a return on assets (ROA) moving toward 2% and return on equity (ROE) approaching or exceeding 20%. Here's Washington Mutual's:
Industry IndustryPeriod ROA Avg.* ROE Avg.* EPSTTM 1.5% 1.0% 19.4% 10.8% $4.23 2002 1.5 1.0 22.8 10.5 4.122001 1.4 0.9 25.6 9.5 3.652000 1.0 1.0 19.8 10.2 2.361999 1.0 1.1 19.8 10.9 2.11
*Industry averages are for savings & loans only.
Source: AAII Stock Investor Pro
Now, this points to excellent management, so why has it fallen off the track? There is no rationale for spending company money to hype your stock with feel-good ads. Shareholders should write or call and demand to know why management's wasting their cash like this rather than leaving it in the bank, lending it out, or increasing its already-sweet 4.16% dividend. If for some crazy reason they like the ad route, why not simply reproduce this table and be done with it.
In the best case, the ads are the work of an exuberant PR department on an unsupervised frolic. If so, a word from on high should take care of it. Worst case, someone will have to spank the managers.
(Got an opinion? Be sure to join the informed investors at our Washington Mutual discussion board! )
Two sales
As presaged in Tech Survivor Gets Pricey, I sold my shares of Rambus at just under $20. Stocks in the high-risk portion of my portfolio must always promise a high return for the risk. I laid out a case that a quick settlement of the Infineon (NYSE:IFX) litigation gave the stock an intrinsic value in the $20-$30 range, keeping in mind the near impossibility of valuing the memory interface technology company. Given the delay in any settlement, I decided to sell at the low end of my intrinsic-value range.
I also sold my Ligand Pharmaceuticals (NASDAQ:LGND) shares at an average price in the $14's, for the same risk-reward reasons. Some readers may know that I picked the biotech drug maker for our annual investment idea guide, Stocks 2003, at $5.16, suggesting an intrinsic value range of $9.35-$12.63 using discounted cash flow analysis (DCF).
Six months later, after Ligand had climbed to $10.75, I followed up in A Painkilling Double. At the time, a favorable marketing deal with Akzo Nobel's (NASDAQ:AKZOY) Organon unit for painkiller Avinza argued for a lower discount rate in my DCF calculation. This would lead to a higher intrinsic valuation than the $9.35-$12.63 range calculated for Stocks 2003. With the stock at $10.75, in my exuberance I wrote that I wasn't interested in selling "by a long shot."
Well, that long shot came in. The stock blew past $10.75, out of the original valuation range and on toward $16. At that price, even reducing the discount rate from 15% to 11%, the stock stood at intrinsic value. With no margin of safety and less upside, I sold as shares dipped back. I would take another look if it were to drop back under $10 and if the company appeared able to avoid more dilutive financing next year.
There are many reasons to buy or sell, depending on your own strategy and your own research. Know why you own a stock and consider ahead of time when you would sell. And please note that circumstances differ. At my stage of life -- 47 -- most of my stock portfolio is in tax-advantaged accounts, allowing me to practice using valuation to help buy and sell without the capital-gains pain. Your situation may differ.
Have a most Foolish week! Thank you for reading.
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Writer and senior analyst Tom Jacobs (TMF Tom9) welcomes your comments at
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Tom owns no shares of companies mentioned in today's column. You can find his portfolio inhisprofile. The Motley Fool isinvestors writing for investors.
