Hi Lou,
I have to say I love your column and read it religiously.
I was hoping you could have a look at Western Alliance Bank for me. I bought in to this bank at about 7.50 on a bit of a flyer after reading an article in the Globe about possible takeover candidates in the banking industry. Between the exchange rate and the stock's performance it hasn't been particularly good to me. However, I think I am seeing some strength in the stock again. I am wondering whether to hold it longer or move on at this point. I would love to hear your opinion.
Thanks
Eric
Hi Eric,
Thanks for the assignment.
Western Alliance , with a market capitalization of $517-million, is a small player in the U.S. banking sector. Their operations are centered in Arizona, Nevada, California, and Colorado, which have been hard hit since the subprime mortgage debacle hit in 2007. The first thing that comes to mind is your interest in the stock based on one outcome. There are three things you can do with your money as an investor. You can invest, which means researching companies with a history of earnings and dividend growth. The second opportunity to put your money at risk is to speculate. Speculations is the process of watching as a company develops its prospects over time with no guarantee that they will build a mine, hit a gusher, or bring their new technology to market.
Finally there is gambling. Gambling is putting your money into a company based on one outcome. In your case, it is a potential takeover. There is absolutely no way to evaluate or measure how or if a takeover will happen, which adds to the risk.
Let's see what opportunities exist to get your money out from under this loss.
The three-year chart tells the sorry tale of a stock that had traded over $35.00 back in 2006. Unfortunately WAL hasn't seen the sunny side of that peak in five years. The shares had been range bound since May of 2010 with resistance at $8.25 and support at $6.75.
WAL broke support in the panic selling that came into the market in August and hit a 52-week low of $4.44 before it caught a bounce.
The six-month chart depicts the lift off the 52-week low and the advance to resistance at $7.00 along the 200-day moving average. The bounce provided a 48 per cent gain from the lows but still has you nursing a loss.
Given the advance is still intact and that we are now in a period of seasonal strength for banks you should hold on to WAL until January 2012 and see if you can get back to your breakeven point. From there you can decide if you want to continue to hold a small cap bank stock that doesn't pay a dividend in the hopes of a premium offer in a takeover.
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Lou Schizas