E*Trade Financial: Spinning the News

There I was, a few minutes into pre-market monitoring, when new E*Trade (ETFC) news arrived. I read the article, going slowly through one section and then smiled… another validation. Then, of course, came the permutations of the original story.

The story that was actually released by E*Trade on Wednesday morning was fairly straightforward - the 21.5% year over year trading gain, 16,000 new accounts in January, a drop in value of client securities commensurate with the market performance at the end of January and stable customer cash assets. If you dig slightly into the story you realize it also gives a glimpse of preliminary February performance. Before I talk about that though, let me mention how news sources re-wrote the news.

The first change to some subsequent stories was to drop any mention of the client securities drop that tracks January market performance; then “assets fall” shows up in the title, and next someone mentions that the 16,000 accounts represented just half (500) of the 1,000 accounts per day that E*Trade hoped to attain.

OK, all very nice lessons on how to attempt to drive a herd, and possibly an unfortunate comment on the state of factual reporting. Here’s my take. I don’t believe it was clarified when E*Trade said they would open 1,000 accounts per day that they would be working weekends. In fact, I’m happy to give them the benefit of the doubt that, given their industry, they could have meant 1,000 accounts per business day (market trading day for them). January had about 20 trading days, so 16,000 new accounts is about 800 accounts per January day by this measure.

Of interest in the story is that it also says that the week after the Super Bowl (February 3) showed a 32% gain in new accounts compared to last year’s game. I don’t actually know the number of accounts gained after last year's game, but I can make an assumption that it was probably a better than average week. An average day over the last 12 months, by the way, was already about 1,100 accounts per trading day, roughly (4,732,535 – 4,456,016)/12/21. Thus, for at least one week this month, they are already BACK OVER the 1,000 account per day mark. The more important thing to take away from this is that at the end of January they were within 10,000 accounts of their all time maximum; February will see them with a new all time high for total accounts, and trading volume is near an all-time high.

What’s Next?

The company has committed to setting aside one billion dollars in support of its banking and loan portfolio. Something over 40% of this was set aside last quarter, but the remaining 50 to 60% will be funded over the next two quarters. This will show as a paper loss, but the reality is that it is a company asset and market capitalization (share price) must rise in recognition of this.

This additional security deposit, as it were, combined with more favorable banking conditions (Fed cuts) should start to be reflected in the bond and credit ratings at some time during the second quarter, and yes ETFC will show profit again by the 4^th quarter of this year. Further, this accumulating billion is not totally stagnant; certainly it should generate some income of its own to help offset the Blackrock springing lien payments.

Jim Cramer is a bit stubborn; he’ll wait to make one of his classic apologies until probably the third quarter, but that will be of little solace to those that listened to him and passed on over a 200% gain… but he is fun to watch.

I would expect a revised price target from someone acting responsibly out there soon, but actual upgrades may still be another month out or they may even wait for next quarter. At some point before the end of the year the share price will break the $8.50 it was trading at before an analyst commented irresponsibly early last November that E*Trade could go bankrupt. That’s right - I’m predicting over a 66% gain from the current price of $5.12 at sometime before the end of this year. This is, of course, my opinion. I currently own shares of ETFC and I continue to accumulate more. Pick your Jim, go with it, and good luck.

Disclosure: Author is a customer and shareholder of ETFC

Comments

[daffy]

Finally, someone who gets it. You should write a book, "guiding the global economic community into depravity: A sojourn into negativity."

I love the new advertising out for Etrade. I think it is brilliant. I give heavyhanded kudos to not only the marketing agency who derived these ads, but also the Directors of Marketing at Etrade for making such resoundingly resourceful decisions. I am very happy with my Etrade stock. The only thing I am unhappy about is that I let the "media" stir my fears and I passed up on a big purchase when ETFC was trading in the low $2's. I do however, think that Etrade will surpass $8.50 by the end of the year, by a long shot. There are great news stories brewing this year that will lead the naysaying nellies from their perch to feast elsewhere, and the market's bearish behavior should return to a mildly bullish one by summer.

Thanks again, there needs to be some optimism in these times, and it is good to see realistic optimism. I personally think it is a great time to invest, and this Etrade "issue" is the perfect example.

2008 Feb 14 08:25 AM

[kurt walter]

January has 31 days. .. 16,000/31 = 516 .. You can open accounts any day at anytime. I give no benefit of the doubt to any highly compensated management. They take the money. So they get the heat. ... Cramer? Who cares? the guy has recommended or dissed about 3,000 stocks in the last 3 years.

2008 Feb 14 12:17 PM

[Pj568]

From above "The company has committed to setting aside one billion dollars in support of its banking and loan portfolio. Something over 40% of this was set aside last quarter, but the remaining 50 to 60% will be funded over the next two quarters. This will show as a paper loss, but the reality is that it is a company asset and market capitalization (share price) must rise in recognition of this."

Learned something new, "paper losses don't matter". I guess that is true in the very short term as there is no immediate cash effect. Just ask ETFC what the importance is when trying to raise cash. Let's see it cost them 20% of the company and they get a 14% interest rate and it's only a loan. Could it be that paper losses do matter?

2008 Feb 14 01:05 PM

[drierp]

Even if they're opening 1000 new accounts per business day, that doesn't give any indication how many they're closing or that are being transfered to other houses..

open 1000, close 2000, and you're net losing customers..

or

open 1000 with $2k each, and close 100 with 25k each, and you're net losing customer assets..

2008 Feb 14 03:12 PM

[dan clue]

I believe Etrade will stay on course and will be profitable this year. As a shareholder the Etrade leadership needs to step up the communication with its shareholders. Communication is Etrade's best weapon against Rogue analysts that have a personal vendetta in damaging Etrade’s brand image.

I will continue to purchase shares because I know as each quarter goes by the share price will significantly increase and I'm in the belief it could top the $16 range by the 3rd quarter results. I currently own almost 40,000 shares.

I would like Etrade do report out weekly with some information. This will silence all nay Sayers except one. Citigroup...

I was thrilled today to see how far Citigroup share has fallen over the last 6 months. I believe there rogue analyst Bhatia's time would be better spent giving an honest assessment on his own company. I think if he did he would find himself unemployed.

I also believe Etrade is in buyout talks. The reason I believe this is because the share price is extremely undervalued and they haven't replaced their CEO. I kind of figure that why replace the CEO and pay him a severance package when you know it am going to be sold. What are some of your opinions? Will Etrade be acquired in the next two months?

2008 Feb 14 06:06 PM

[fox]

COMMENTS ON ETRADE ANYONE????? WHAT DO YOU THINK OF THE STOCK?

2008 Apr 16 08:18 PM

[Ronaldo]

Its a buy. Wait for short sellers bring it down to $3.30, and then buy! If you have it, hold or try to play with shorts at your own risk. I am accumulating this stock, bought at 4, 3.93 abd 3.30. Have not sold yet...

2008 Apr 17 08:14 PM