Betting The House A savvy investor is wagering over $1 billion that Wall Street is wrong about Washington Mutual
By Cybele Weisser

(MONEY Magazine) – It doesn't take Sherlock Holmes to surmise that Bill Nygren's favorite stock is Washington Mutual (WM). The celebrated manager of the very concentrated Oakmark Select fund (a MONEY 100 selection for several years running) has a whopping 16% of the fund's assets in the stock (it's also the top holding in Nygren's Oakmark fund, where his bets are more spread out). In all, Nygren has staked $1.1 billion on the Seattle thrift. This isn't a new holding in the Select portfolio--Nygren first bought shares in WaMu (as it's informally known) in 1998, when the stock was trading in the mid-20s.

After a heady few years during the housing boom, Washington Mutual's fortunes took a sudden turn for the worse in late June, when rising interest rates caused an abrupt decline in mortgage loans--and in WaMu's profits. At $38, the stock now sits near its 52-week low. But Nygren thrives on stocks beset by adversity. That's where he knows he'll find bargain-priced shares of growing companies. And Washington Mutual certainly fits the Nygren mold.


Nygren believes that Wall Street has misjudged the impact of Washington Mutual's profit shortfall. In the late 1990s, the company grew from a local savings bank to one of the largest savings and loan companies in the U.S. In an industry usually marked by grumpy tellers and off-putting jargon, WaMu has built a reputation for exceptional service. That has made it easier to sell its clientele a range of high-margin products, from mutual funds to home-equity loans. Investors have fixated on the explosive growth in WaMu's mortgage lending, but earnings from checking account fees, business loans and the like made up two-thirds of its $3.9 billion in profits last year. Though its mortgage profits are predicted to fall 75% this year, Nygren expects earnings from retail banking to rise at least 15%.

WaMu could also be a potential takeover candidate, says Nygren, thanks to its nationwide presence and low stock price (on book value, it trades at a 20% discount to its peers' average). Judging from the sums paid recently to acquire other retail banks, he adds, WaMu is worth at least $48 a share vs. its recent $38. The possibility of a takeover, plus its 4.5% dividend yield, "serve as a backstop for the stock's price," he says.


During the housing boom, WaMu's mortgage outlets drew in more customers than its bank branches did. Fewer new mortgage clients could crimp sales of many kinds of banking products. WaMu also plans to lay off 2,500 workers. If that doesn't trim costs as expected, earnings could keep falling.


Nygren says he'll closely monitor the company's retail expansion. If the dollar amount of deposits drops or the pace of checking accounts opened slows, he'll consider selling. "The growth in the retail bank is just as important to us as the earnings number," he says. Otherwise, says Nygren, he'll hold on at least until WaMu's share price approaches $48.