E*Trade Financial Drops, Presents Buying Opportunity

A topic that we've been addressing over the past several months, and more frequently over the past several weeks, is financial institutions unveiling mortgage related losses.

The latest financial institution to make this announcement is E*Trade Financial (ETFC), but this one hit the company hard on Monday November 12, 2007. The stock sliced off over fifty percent of its market value as they announced that their earnings will not meet the expectations of Wall Street due to write downs.

These write-downs come from bigger than expected losses as it relates to mortgage backed securities; same as Citigroup (C) and Morgan Stanley (MS), but the difference is that E*Trade is relatively a peanut of a company compared to such giants. So their capability to absorb massive losses may be the concern that is looming.

The company stated that they are setting aside approximately $500 Million to offset potential bad loans and write downs; this was all that it took for analyst to jump on the bandwagon.

Citigroup Analyst Prashant Bhatia took it a step further and titled his report "Bankruptcy Risk Cannot be Ruled Out." Granted, Chief Executive Officer Mitchell Caplan took a risk, just as every financial institution did in the industry, although the dim outlook of analysts such as Bhatia have tickled the selling trigger finger of not only institutions but of small individual investors globally. In my opinion this slide has just put E*Trade Financial at a deep discount.

The stock seems to be oversold and once the dust settles the possibility of the stock climbing, at least to the high single digits, is there. As I always say, buy into weakness and sell into strength, and this is a definite weak point for E*Trade.

Disclosure: none