A Bank the Gurus Believe May Break Out

Ten years ago, few outside of the Southeast had heard of the North Carolina-based bank Wachovia (WB - commentary - Cramer's Take). No more.

Through an aggressive acquisition strategy and internal growth, it has vaulted up the food chain to become the fourth-largest U.S. bank based on assets (over $520 billion). This rise in prominence is no fluke, as the company is performing well and laughing, as Liberace did, all the way to the bank.

The bank has a strong retail presence, particularly in the Southeast and Mid-Atlantic states. It has also shown itself capable of integrating plenty of acquisitions. It has made five acquisitions in 2006, four in 2005, three in 2004 and five in 2003.

Its acquisition of Golden West Financial, which is expected to close by the end of the year, will bring Wachovia to the western U.S., giving it 3,400 offices in 21 states and the District of Columbia.

The stock has been idling in the mid-$50s most of the year. With the completion of the Golden West acquisition and the implementation of some aggressive cost cutting, the stock could be poised for a breakout.

What the Gurus Say

My strategy based on James P. O'Shaughnessy's investing approach singles out Wachovia because it is large (market cap in excess of $88 billion), has positive cash flow per share ($5.20), a large number of shares outstanding (1.6 billion) and its trailing 12-month sales are more than 50% above the average for the S&P 500.

Plus, Wachovia is among the 50 companies that pass these screens with the highest dividend yields (4%). In August, the company announced a 10% increase in its quarterly cash dividend.

Wachovia also rates highly with my strategy based on the investment style of Peter Lynch. The bank's P/E is a modest 13.2, while its EPS growth rate, based on the average of its three-, four- and five-year EPS growth rates, is a sizzling 49.15%. (This actually may be a negative because of the difficulty of sustaining such a high growth rate.)

It has a P/E to growth ratio of 0.27, which is very strong. A P/E/G of 1.0 or less is acceptable; 0.5 or less is a cause for jubilation.

My Lynch strategy uses the equity/assets ratio as a way to determine a financial intermediary's health. Once again, Wachovia shines with a ratio of 9%, well above the strategy's 5% minimum. Finally, Wachovia's return on assets of 1.27% is above the minimum 1%.

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At the time of publication, Reese was long Wachovia, although holdings can change at any time.

John P. Reese is founder and CEO of Validea.com, an investment research firm, and Validea Capital Management, an asset management firm serving affluent investors and companies. He is also co-author of the best selling book, The Market Gurus: Stock Investing Strategies You Can Use From Wall Street's Best. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Reese appreciates your feedback. Click here to send him an email.

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