Betting On Financials

01/30/08 09:28:27 AM

by Mike Carr, CMT

If the market continues higher, and the financials move with it, Washington Federal would be a smart way to play the rebound.

Security: WFSL
Position: Buy

Washington Federal Savings (WFSL) has more than 100 full-service branches located in Washington, Oregon, Idaho, Arizona, Utah, Nevada, New Mexico, and Texas. With the exception of Nevada, these states have strong economies. Washington Federal's loan portfolio offers exposure to all areas of real estate. It has been around since 1917, when it began as a small bank in Seattle.

This is a boring company with steady earnings and a small dividend. Earnings were $1.53 per share last year and are expected to be flat in 2008 before growing by 12.5% in 2009. The stock offers a dividend yield of 3.60%. It trades at a premium to its peers as measured by fundamental ratios, recognizing the solid management of this bank.

Figure 1 shows a recent breakout through a down trendline. Momentum and the moving average convergence/divergence (MACD) confirm the breakout, and this stock is very likely to move higher with the market. The October highs, more than 25% above current prices, offer the first significant resistance level. The breakout occurred at an old support level of 22, which offers a low-risk stop location for this trade. More aggressive traders can use the trendline to set a stop, which increases the risk by point and a half. Another factor limiting risk is the low beta of 0.85, which means WFSL is likely to fall 15% less than the market if stocks resume their bear market.

FIGURE 1: WFSL. WFSL broke through a trendline last week on a strong momentum and high volume.

Graphic provided by: OmniTrader 2008.

Buyins.net reports that shorts will need almost 7 days to cover their sizable positions in this stock, and they calculate that the average short is now losing money since the squeeze trigger is 22.54. The squeeze trigger represents the average price level where short positions were initiated. At this level, many shorts are likely to cover their trade and find a more profitable opportunity in the market.

With a 2-to-1 reward-to-risk ratio, WFSL offers traders a great opportunity to profit in a rallying stock market. The stock also offers exposure to a financial stock that is not overexposed to the subprime mortgage market.

Mike Carr, CMT

Mike Carr, CMT, is a member of the Market Technicians Association, and editor of the MTA's newsletter, Technically Speaking. He is also the author of "Smarter Investing in Any Economy: The Definitive Guide to Relative Strength Investing," and "Conquering the Divide: How to Use Economic Indicators to Catch Stock Market Trends."