Today's 3 Picks: WB, AAPL, ING

Wachovia (WB) plunged to pennies a share in premarket activity Monday before trading was halted as the market digested the government-brokered sale of its banking operations to Citigroup (C).

The Charlotte, N.C.-based bank is the latest domino to topple in the ongoing mortgage and credit crisis. Wachovia was undone by its huge mortgage loan losses, including tens of billions of dollars in so-called option ARMs -- adjustable-rate mortgages that let buyers potentially increase the size of their loans by paying less than the monthly interest on their principal. These types of loans were instrumental in bringing down Washington Mutual (WM), which last week went through the largest bank failure in U.S. history.

That turned market attention to Wachovia, which drastically increased its exposure to mortgages with its 2006 acquisition of home lender Golden West Financial. The already battered shares plunged to $10 apiece Friday as speculation mounted that Wachovia could collapse without intervention.

Government regulators made a special point of keeping Wachovia from going under, and assured depositors that their money was safe. "All depositors are fully protected and there is expected to be no cost to the Deposit Insurance Fund," the Federal Deposit Insurance Corp., which protects individual bank accounts up to $100,000, emphasized on its web site. "Wachovia did not fail; rather, it is to be acquired by Citigroup Inc. on an open bank basis with assistance from the FDIC."

Richard Staite, an analyst at London-based Atlantic Equities, said the sale was another necessary step to help stabilize the beaten-up financial sector.

"Clearly, this was a deal that needed to be done, and there was no easy option for the authorities in this case," he says. "I think that allowing Wachovia to fail and then be acquired would have been an even worse option. The losses would have potentially extended not just to equity holders but bond holders as well, and that could have had an even greater destabilizing effect on the market."

Citi shares climbed on news of the deal, despite its announcement that it will also take on a big chunk of Wachovia's debt and must raise $10 billion through a secondary stock offering that will dilute current shareholder value. Citi also cut its dividend in half, to 16 cents. The acquirer will take a hit of up to $42 billion in losses on a $312 billion pool of Wachovia loans, some of which will default. The FDIC will assume any further losses. Citigroup granted the FDIC $12 billion in preferred stock and warrants in exchange for the agency taking on the risk, the FDIC said.

Both Citi and Wells Fargo (WFC) featured prominently in takeover rumors, with many analysts giving Wells Fargo the edge. Robert W. Baird & Co. analyst David George wrote Monday that Wachovia's deposit franchise made it an attractive acquisition target.

According to Atlantic Equities' Staite, Wells Fargo may have made the smart choice in doing nothing. "I think Wells Fargo has historically been extremely disciplined in the assets it's acquired, and hasn't shown any appetite to have a nationwide banking presence," he says.

Wachovia said it will remain a public company composed of Wachovia Securities, its brokerage unit, and investment manager Evergreen Asset Management.

"During recent weeks, the financial landscape has changed significantly and presented us with unprecedented challenges," said Wachovia Chief Executive Robert Steel in a written statement. 

Wachovia said it will stay in Charlotte, although its brokerage unit will still be based in St. Louis, the longtime headquarters of its A.G. Edwards subsidiary.

Bottom Line: Hold
With a trading halt in place, there's no other option. When it lifts, it's hard to imagine shares will be anything but wildly volatile.

Shares of Apple (AAPL) took another double-digit plunge Monday, the worst in seven years, after two analysts cut their ratings on the stock based on worsening general economic conditions.

"We worry that consensus estimates have not been revised down to reflect slowing global consumer demand and that a broadly positive investment bias…limits upside to (Apple) shares over the next three to six months," said Morgan Stanley analyst Kathryn Huberty in a report published Monday. She cut her rating to Equal Weight from Overweight.

RBC Capital Markets analyst Michael Adamsky downgraded the stock to Sector Perform from Outperform, citing diminishing demand for Macs in a survey of likely PC buyers.

Shares dropped sharply last week as lower-priced laptop computers displaced Macbook models from top-selling spots at Amazon.com, a trend that's emerged throughout the summer, according to ThinkPanmure analyst Vijay Rakesh.

"While MAC Desktops and 3G iPhone sales have been doing well, the notebook market could be impacted in the peak back-to-school season with the entry of notebooks from Asustek, Acer, MSI and Dell (DELL)," he wrote Friday. "The Macbook is the flagship workhorse for the company and we believe any potential slowdown with a price-sensitive consumer could impact margins." He lowered his 12-month price target to $170 a share from $200.

Apple, which reports fiscal fourth-quarter and full fiscal year earnings at the end of October, will likely meet its earlier quarterly guidance of $1 a share, Needham & Co. analyst Charles Wolf says. That's in large part because the company has historically offered very conservative guidance, and investors now routinely expect earnings results well ahead of company figures. The current Street consensus calls for earnings of $1.11 a share.

"The financial markets are in a meltdown, but I think there's very little doubt that Apple will hit its guidance for the Sept. quarter, which ends [Tuesday]," he says. "Mac sales continue to be very robust relative to the market, though I wouldn't be surprised to see the PC market shrink in Q3 and Q4.

"These downgrades are economic calls, not calls on fundamentals," he says.

Apple's gadgets and computers, from the smallest iPod music player to the priciest bells-and-whistles laptop, have devoted followings among consumers, but it's likely they won't be spending as much money in the next few months.

Apple's fortunes will be tied to the holiday shopping season, which the National Retail Federation said last week would be the worst since 2002.

"What's getting embedded in the stock is a lousy Christmas quarter, and in one sense that's probably fair," Wolf says of the recent plunge. "If financial markets continue to melt down and unemployment goes up, consumers are likely to spend less this Christmas than they did last year."

Bottom Line: Buy
Even the smallest earnings beat will give this stock a short-term bounce, and the strength of the Apple brand means investors willing to ride out a rough patch could be happy to get shares at this price.

Shares of Dutch finance giant ING Group (ING) fell Monday as European banks caught in the credit crunch brought the global scope of the financial-services industry into sharp focus.

Regulators in Europe scrambled to bail out failing Brussels-based bank Fortis, which was partly nationalized by the Netherlands, Belgium and Luxembourg. The three countries chipped in $16.1 billion to save the troubled banking and insurance giant that overextended itself in last year's joint purchase of the Dutch Bank ABN Amro. Fortis, Britain's Royal Bank of Scotland (RBS) and Spain's Banco Santander (STD) paid 70 billion euro ($102 billion) for ABN Amro.

Shares of ING fell as it was named as a possible acquirer of Fortis's stake in ABN Amro, a move that would force it to raise capital at a time when that's both expensive and difficult. While market watchers said the failure of Fortis would dwarf Washington Mutual's collapse -- the European company is more than three times the size of the U.S. bank -- ING may find it tough to step up, says Paul Beijsens, an analyst at the Dutch bank Theodoor Gilissen.

He said the bank had spare capital of about 3.9 billion euro ($5.7 billion) when it last reported earnings, but that's been eroded by a faltering investment portfolio.

"To finance that [ABN Amro] deal, it believes it would have to go to the markets," Beijsens says, and that's an expensive proposition.

But European regulators and banking authorities in the United Kingdom are moving swiftly to shore up crumbling institutions in a hurry, wrote CreditSights analyst Simon Adamson on Monday. Recent days have seen the weekend nationalization of U.K. bank Bradford & Bingeley and a 75% stake purchase of Glitner Bank by the Icelandic government.

That may mean a heavy government hand pushes ING to pick up some of the Fortis fragments, Beijsens says.

"To create shareholder value, I doubt that making that investment is a good one," he says. "Of course, everything has its price. Maybe for the national interest, it can remain an option."

Bottom Line: Buy
If ING is part of government- and regulatory-supported consolidation, this dip may be a buying opportunity for a long-term investor.