E*Trade Financial: Great Company, Great Bargain

E*Trade Financial Corporation (ETFC) has taken a tremendous beating over the past year, even getting dubbed the worst performing stock in the S&P 500. The company has since unveiled their 'turn-around' plan, and it's being viewed with mixed opinions. Here is my view on the past week's news and where the stock is heading.

E*Trade directors buy $1.9M worth of stock

There is talk of this being purely a PR move, others think this is simply a way to manipulate the stock; however their justification is inadequate. Many believe that $1.9M is simply too small a number to be significant to these directors; however I would have to disagree. When you buy stocks - do you ever put your entire year’s salary on one stock? Probably not. Would you wager your own personal money in a PR move to your company? Probably not. They either believe in the company, just as we do, or they know something that we don’t, which could only be good. While I do believe that there is a PR piece to this event, I do believe fundamentally that these directors are very confident in their company and their stock.

E*Trade airs two advertisements during the Super Bowl

E*Trade has a long history of buying ads during the Super Bowl. This year was no different. It would be somewhat foolish to believe that the airing of this Super Bowl ad will have an immediate effect on the company’s stock; however had it not been run, it might have spooked some investors who are accustomed to seeing the ads every year. They do have a very bold statement this year; 1,000 new accounts daily. That kind of growth (if they hit the targets, of course) will be a major component to their growth and add significant value to their balance sheet. You can view the ads on my previous post E*Trade Stock Insight

Maybach Financial adds E*Trade Financial Corporation to their Watch List

Maybach Financial is a syndicate of financial informants representing a true investing experience. Taking research from financial consultants, brokers, researchers, and conglomerates from around the world, they focus to give investors the financial advantage necessary to make money in all markets. As of Friday, February 1, 2008 they have added ETFC to their portfolio. I find what is common for these large institutions, is they all tend to mimic each other’s moves. It doesn’t take long before these institutions cause big momentum in a stock. It’s always good when people want to buy!

Why we love this stock

We are firm believers in Benjamin Graham’s teachings, and although the great Warren Buffett himself probably wouldn’t purchase ETFC (he’s just not into technology), the fundamental components of the company are there. Just look at it’s book value: $6.13 / share! It’s currently trading at roughly $5 / share. A reasonable, cheap price for this stock should be in the $8-$12 range, and that would still be “cheap”. This stock has a lot of room to grow with a great, extremely profitable and strong business behind it. Any drop in price in our opinion would simply bring a great buying opportunity in a great company. In addition to a profitable business model - they also happen to have the best trading platform available on the internet today.

What to expect this week

This is obviously an almost impossible section to fill out, as we are not equipped with crystal balls or time-warping machines (although we’re working on it). However, based on current trends, I’m confident that we will see a gain on this stock by the end of the week, anywhere from 3% to 18% depending on news and new institutional owners. There has been a tremendous amount of volume on this stock last week, reaching over 100M shares traded in a single day, which blows their average away of roughly 40M in volume. This is an indicator that there will be volatility as some investors will sell prematurely, causing dips in the share price. You should be alert this week for such drops as buying opportunities for the stock.

Where there is much uncertainty is how these ads will affect investors. There are going to be strong opinions about how effective the ads will be - and in a market right now filled with fear, all it takes is a little bit of bad news to cause catastrophic effects on a stock price. Effective or not - on a long term horizon - you should definitely be taking advantage of this opportunity to own an industry leader in online trading / banking at such an undervalued price.

Disclosure: Author has a long position in ETFC

Comments

[dan clue:]

I would like more news out of Etrade. I believe this would continue to push the share price to a more reasonable level. At the current levels I will contine to purchase this stock, I believe by May this stock will increase to $10. What's holding this stock and other stocks in the dumps are the analyst's that continue to give negative opinons in order to force the fed to do another rate cut in March. Analyst's are slowly losing creditability. Investors need to do their own research.

2008 Feb 05 06:14 AM

[Pj568:]

Losing 1.4B, issuing 2.5B of 12.5% springing lien convertible preferred with 20% dilution and retaining 12B of home equity loans does not fit my definition of a great company. Seems like some significant events remain to play out.

2008 Feb 05 06:30 AM

[dan clue:]

What the previous person doesn't realize is the billion's Etrade made with the mortgage loans. In addition Etrade is in acquistion talks and working out the final details.

2008 Feb 05 06:37 AM

[Wall_St_Geek:]

Maybach Financial is not exactly Fidelity, CSFB, Deutsche Asset Management of any kind of Tier 1 investment / research house. Personally, I do believe E-Trade can be a good short-term play as momentum builds (as shown in the last Q results), but the Maybach reasoning does not hold a lot of water.

2008 Feb 05 08:34 AM

[larry-van:]

I thought of moving my IRAs, Check-Bill-Pay, and Stock trading accounts away from Etrade over the past 4 months, but, I could not find a company that offers a security token logon (from EMC / RSA ). How can anyone trust their accounts to a single userid and password. My token generates a new different passowrd number every minute.

2008 Feb 05 09:17 AM

[daffy:]

I think it is a quite interesting attitude we see here in regards to Etrade. My guess is that Etrade will be trading close to it's 2007 high within a year. I am pretty convinced that Etrade has rid themselves of much of their problems and they only place to go is up. I am holding strong with Etrade, averaged out at just below $4, and will contiue to buy if there are subtle downturns (like today). I just hope the naysayers keep nellying the market so that I can wrestle my funds from other non-performing stocks and get more vested into eTrade.

2008 Feb 05 09:29 AM

[dpinvest:]

Mr. Deen's article on E-Trade fails to even mention the fundamental debt & earnings outlook of this company. Book value evaporates quickly when you lose money & incur high debt levels at high rates. Why should any of us own this stock? How do we know that E-Trade won't have further large mortgage writedowns?

2008 Feb 05 10:27 AM

[dpinvest:]

How much more of the $12B in mortgages on the books will need to be written off? What is this company's plan for returning to profitability? Perhaps a deal hasn't been done yet because no one wants to buy a bunch of mortgage liabilities hanging on an unprofitable brokerage business, that is overleveraged with high interest debt/pref stock.

2008 Feb 05 10:32 AM

[dan clue:]

I believe the leadership at Etrade should step up and release a press release in regards to its January performance. On the 24th they released end of year results and some databut that data didn't cover the full month of January. The Etrade leadership should be on the offensive and talking or issuing press releases ever week. This would shore up investor confidence. WE all seem to agree that the worst is over at etrade and we believe that this stock is undervalued and will make money selling these shares at a nice profit it will just take time.

2008 Feb 05 05:32 PM

[vodka_tonic:]

terrible management, name brand stock trading firm with some ok banking assets (their valuation is a mystery). not a good company to hold for the long term.
might bump up for the short term if the economy holds up :)

2008 Feb 05 10:49 PM

[fxtrader07:]

This company is essentially worth zero. Why? Apart from guessing this or next quarter's earnings the company has a real problem that isn't going to disappear anytime soon: Any further bad news regarding their mortgage portfolio (btw, what business has an online brokerage company to invest there at all??) will make for very bad headlines again - and it is just a matter of time that etrade will have to report very high net-losses of customers. those leaving and those getting their accounts killed in the current bear market. the latter is completely overlooked by the author. if the stock markets were headed for a bull run and the mortgage issues to play out soon, etfc had a chance. with two very negatives hitting at the same time and the company lacking any reserves to go through an adverse business cycle, etfc is headed much lower. If i were an etrade customer and /or shareholder, I'd run for the hills.
Sad enough, but incompetent, greedy and ignorant mamgt have ruined this company. it's in a death spiral with very very little hope to escape from.

2008 Feb 06 04:25 AM

[dmilkman207:]

I have heard mixed opinions on Etrade lately. The anaylsts certainly are negative, of course late to the party as usual, they are calling the stock a sell when it was $2.50. I dont remember hearing much of anything when It would have done anybody any good like when the stock was in the twentys. Etrade clearly lost a lot of money in the morgage mess. Is the worst behind them? Time will tell. What I do know for sure,Etrade has a first rate trading platform and user friendly web site. The insiders are putting their money where their mouths are and buying their stock. Thats good enough for me I am long the stock and will continue to be a customer.

2008 Feb 06 05:44 PM

[kurt walter:]

Analysts saying sell at $2.50? They say sell at the bottom. Just great. Why do people still take their advice? Go against them. Double your money quickly.

2008 Feb 08 01:00 PM

[phdinsuntan...:]

rumor is that China is buying some financial with future in the US including this...sell the news

2008 Feb 08 02:58 PM

[dan clue:]

One can buy and sell then news but one can't forget the value etrade has wether purchased by china or by google. The reason why Etrade stock price fell so drasticly in 3rd/early 4th quarter. Was because one analyst was reckless with his advise and said "Etrade could file bankruptcy any day now, 15% chance but highly unlikely" the B word sent panic. That analyst works for citigroup his statement could be used on any hot selling stock. So that is why I will continue to buy Etrade and will make a substantial amount because of this rexkless analyst.

2008 Feb 09 11:31 AM

[realgelmer:]

I was looking for a place to double my money since jan 8th-08 and was listening to all the noise on tv.emails.newsletters etc etc,all the while keeping cash on my etrade acct,then i look back at the etrade shares performance for this past month and guess what? had i kept my 30k in their shares today i should have 60k any comments???? I could"nt see the forest from the trees,math does not lie.1+1=2

2008 Feb 09 08:23 PM

[dan clue:]

It's never to late to make money on Etrade. Yes you could of almost tripled your money had you bought at its lows. Etrade will begin to get traction as each day passes. I would like to see Etrade leadership buy more stock and a press release updating its shareholders in regards to the state of the business. Etrade needs to be agressive and continue on the offensive.

2008 Feb 10 12:08 PM

[prescient11:]

No matter what you think about the company, consider this. Mr. Layton, who is not an idiot by any means and was in consideration for the top job at JP Morgan took all of his compensation to be CEO in stock options. That's right. The $1M salary he receives he was already receiving in his capacity as Chairman of the Board.

To take the CEO job, he is taking absolutely no cash. He has nothing but stock, and his strike price is $4.27. That makes me feel pretty good about his views on where Etrade's stock price should be. Now we can listen to people opine in the comment session, or we can review the cold hard facts above. Oh, and as icing on the cake, Mr. Layton spent $1M of his own cold hard cash purchasing Etrade stock on the open market for $4.07.

I'll put my money beside Mr. Layton's any day of the week.

2008 Mar 06 09:56 AM

[Short seller:]

Prescient11: I agree

2008 Mar 07 12:06 PM