Tuesday, 12 June 2007

Moving to the W's...buying Whole Foods, selling WaMu

OK, so my first trade has worked a treat...in just 11 days I have made over 8%! ATI has dropped like a stone, whilst Apache has risen 1-2%. See the spreadsheet.

Second trade - skipping the B's and going straight to W as I have a view:
Long WFMI (Whole Foods), Short WM (Washington Mutual).

WFMI trading at $38.38, with a market cap of $5.44bn and a P/E of 28.6. Yes the P/E is off-putting, especially with the forward P/E still being estimated at 25, but this company has some serious growth potential. Not only is the "green" and organic market only going to get bigger (even if it does all seem like a bit of a fad just now), but they have just opened their first store in the UK, and their is massive potential not only there but throughout the developed world for their products. I am comfortable in holding this one for the long-term.

WM trading not far off all-time highs at $42.46, pretty amazing when you consider how quickly the US housing market has fallen/is falling, and how high defaults are. Trend seems pretty clear, and I don't believe in housing busts ending quickly, so these guys have a definite revenue problem coming from lower origination, further problems from increased defaults on their portfolio of mortgages, dodgy accounting of Option ARM's (realising revenue without actually getting paid...hmmm, Enron anyone?) that may gain publicity, and possible cash-flow issues if the Wall Street warehouses start putting fraudulent loans back to them (not sure off the top of my head how many stated-income mortgages they've written, but I'm sure it's high, and I'm sure a decent portion of them are fraudulent, allowing mortgages to be put back to them at face value...yikes). Trading at $37.5bn market cap, and a P/E of 12...only thing holding up this dog is the dividend yield of 5.20%. Sell.

Any other thoughts on relative value trades appreciated!

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