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Topic: Growth Stocks

Wachovia Corp. $56 – New York symbol WB

WACHOVIA CORP. $56 (New York symbol WB; Conservative Growth Portfolio, Finance sector; Shares outstanding: 2.0 billion; Market cap: $112.0 billion; WSSF rating: Average) is the nation’s fourth-largest bank.

Like Bank of America and J.P. Morgan, Wachovia has used acquisitions to grow in the past few years. In 2005, it tried to buy MBNA, but could not reach agreement on a price. However, Wachovia wound up with 150,000 of MBNA’s credit card accounts. That helped it start its own credit card business, and it now has 350,000 credit card accounts. Credit cards account for just 1% of Wachovia’s total loans, so there’s plenty of room to expand this business.

Wachovia’s latest acquisition is its $24.2 billion cash and stock purchase of Golden West Financial Corp., one of our long-time WSSF recommendations. Golden West gave Wachovia a much greater presence in California and nine other western states, and increased its assets by roughly 20%.

Thanks to Golden West, Wachovia earned $1.19 a share (total $2.3 billion) before merger costs in the fourth quarter of 2006, up 22.7% from $0.97 a share ($1.5 billion) a year earlier. Revenue rose 30.3%, to $8.6 billion from $6.6 billion.

It will probably take Wachovia most of 2007 to fully absorb Golden West. But Golden West’s focus on adjustable rate residential mortgages, and its close attention to credit quality, will cut Wachovia’s overall loan losses.

The stock has stayed in a narrow range since the Golden West purchase. It now trades at just 11.2 times the $5.00 a share it will probably earn in 2007. The $2.24 dividend yields 4.0%.

Wachovia is a buy.

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