E*Trade's (ETFC) management is doing everything right to turn the company around, and their efforts will reap benefits for shareholders sooner rather than later. The stock has obviously taken a serious hit due to its careless investments in commercial mortgage-backed securities and other derivative products. The company has also done a great job disclosing the magnitude of future writedowns, namely $3 billion over the next two years, which in turn has painted a clearer picture of future performance. Joe Moglia, the CEO of TD Ameritrade (AMTD), recently mentioned on CNBC's Fast Money that the defection of customers from E*trade has already taken place.
Despite the financial turmoil, management has shrewdly decided to focus on investing in its core competence. The company is continually investing in its trading platform; after having had an account with TD Ameritrade and Schwab (SCHW) I can attest to E*Trade having a superior trading platform. Another great initiative has been the firm's global trading platform, namely the ability of a U.S investor to invest in stocks traded on a variety of global stock exchanges in local currencies. That strategy should become highly accretive to earnings once it gets more widely adopted. The company's marketing strategies have been highly effective and have allowed the company to at least regain some of the customers who had switched to other brokerages.
I find it quite perplexing what downside catalyst the shorts are looking for in this name, now that all the bad news is more than priced in. The company recently beat estimates by announcing a much smaller than expected loss and I expect E*Trade to turn in a profitable quarter by year end. Citadel's $2.5B cash infusion (at $4.78 per share), while being a bit dilutive, provides for a strong floor as the hedge would rather buy out the entire company than let its lose it principal.
By betting against a company with rapidly improving fundamentals, the shorts are in effect digging their own graves. Analysts have been known to be late to the party, whether it be to the downside or the upside. 21 of 23 analysts who currently cover E*Trade have a negative or neutral rating on the stock; that is actually a positive rather than a negative as I expect a wave of recommendation upgrades in this name that will send the shorts panicking for the exits.
The 20% of investors shorting this stock are going up against a management team that is taking all the right steps to turn things around. I expect a wave of analyst upgrades and short covering panic that should propel ETFC to $10 by year end.