Are Discount Broker Shares Worth Owning? Depends Which One

The third quarter was a favorable one for the longs. Except for a few short-lived, minor pullbacks stock prices moved higher through the quarter. Stock price volatility declined, takeover activity rose, and risk appetite improved to help the S&P gain 15%.

Recently I commented on the seemingly unfathomable transactions of large financial services firms divesting their asset management businesses to investment management firms in such a favorable market environment. In the same vein, one would expect discount brokers to roll in dough under such favorable market conditions. Financial reports from discount brokers like Charles Schwab (SCHW), TD Ameritrade (AMTD), and E*Trade Financial (ETFC) however portray a different story.

During the third quarter, trading activity increased at AMTD and ETFC but declined at SCHW. Adverse impact from low short-term interest rates, bite from charges taken to shore up capital, and expenses related to acquisitions combined to offset the benefit brokers derived from an up-tick in retail stock trading activity.

Here are the specifics:

Charles Schwab: A 9% decline in daily average revenue trades combined with waiver of $78 million in money market mutual funds fees caused SCHW’s quarterly revenue to decline 19% from the year-ago period to $1.0 billion.

TD Ameritrade: AMTD’s acquisition of options-trading specialist thinkorswim helped trading activity increase 35%. However, AMTD’s overall revenue grew just 1% to $658 million as low interest rates reduced income.

E*Trade Financial: ETFC’s daily average revenue trades increased 7% from the year-ago period helping quarterly revenue to increase 52% to $575 million. A massive $773 million charge taken for the $1.74 debt exchange thrashed ETFC’s income statement.

Are discount brokerage shares a buy, sell, or hold?

The prospects for discount brokers are getting brighter. GDP data for the third quarter suggest that the recession has ended. Although there are concerns over the pace of economic recovery, following the lead taken by some countries like Australia and Norway, the Federal Reserve may increase short-term interest rates in 2010. The profitability of discount brokers stands to benefit from a rise in short-term interest rates. Additionally, discount brokers earnings could receive a further boost if revenue trade volumes hold steady or rise.

Among discount brokers, AMTD and SCHW are better positioned to prosper from an improved economy and a favorable market environment. Shares of AMTD and SCHW are suitable for most retail investors. E*Trade may break even in 2010 and enhance its takeover appeal. However, the discount broker is saddled with quite a chunk of toxic assets. As such, ETFC shares are suited only for venturesome investors.

Disclosure: I do not have long or short positions in any of the securities discussed.

Comments

[TCK:]

With the proliferation of even lower commissions from various other brokerage firms, ETrade and Ameritrade may be considered "Discount" house in name only.

They may be a viable investment, but even a mildly knowledgeable investor would be disappointed in their commissions and service.

Nov 04 09:14 AM

[connorport:]

I disagree. I am extremely happy with the platform and fees at ETFC. I also recently bought the stock because i think it has the most upturn potential. I bought it because people are going to it in droves. Not only the younger newer investors but the babyboomers are converting as well. No need to pay brokers to lose your money when you can have the option to buy at the spur of the moment catching a stock on a bottom bounce or selling covered calls if you see a probable "too high" run. I myself took a huge 75% plunge when the market tanked and with the tools that E*Trade has available i was able to turn that around to a 105% gain for the year. I cannot be unsold on the platform or the stock at this price.


On Nov 04 09:14 AM TCK wrote:

> With the proliferation of even lower commissions from various other
> brokerage firms, ETrade and Ameritrade may be considered "Discount"
> house in name only.
>
> They may be a viable investment, but even a mildly knowledgeable
> investor would be disappointed in their commissions and service.

Nov 04 10:33 AM

[flea:]

I have been an Etrade user for years. I live out of the country, and their services make my financial side of life very easy. They refund ATM fees. They do not charge for transfers and bill pay. You can transfer money instantly b/w money market, broker and checking accounts instantly. The BIG BANKS will never give you these services. The generation X and younger crowds will make the discount brokerage stocks fly high one of these days. This company is on shaky ground at the moment, but it will be prosperous once again in the next couple of years. I bought the stock at $1.40 and am expecting to at least quadruple the initial investment within 3 yrs.

Nov 04 11:26 AM

[Nettligent:]

ETrade was a great company to start with but its management and Board of Directors screwed up badly with quick fixes which digging a deeper hole.
Either take a painful moves to prepare for future growth or sell themselves now.

Nov 04 07:05 PM

[Sam Subrama...:]

Agree. E*Trade has a pretty good trading platform. ETFC is a case of a good company that lost its way trying to grow. Going into mortgages has cost the company big time.

Nov 08 12:55 PM

[sdfsdf:]

I opened and an account at a deep discount broker called zecco and they suck no comparison to ETFC or AMDT. AMDT is far superior and worth the fee at least for me they are.

Nov 13 12:22 PM