E*Trade Primed for a Breakout
E*Trade's (ETFC) management is doing a superb job in correcting the errors of the past and bettering the firm's position for the future. Through of a series of brilliant marketing campaigns (i.e. funny baby commercial) and creative initiatives (global trading), the company has managed to retain its retail client base. The April activity report was surprisingly bullish, as average revenue trades were up 5.8% year over year while the stock was trading at 6 times its current value. While management has disclosed that further writedowns and capital dilution may quite possibly occur, these low expectations will play to ETFC's advantage rather than disadvantage from a trading perspective.

Shorts have overstayed their welcome in this name, currently standing at ~23%. As evidenced by the price action in Fannie Mae (FNM) in the first week of May, namely when it announced a massive writedown followed by a significant pop, blindly shorting financials doesn't work anymore. The large short interest in this name should encourage, rather than discourage, investors as shorts naturally have short investment horizons and become increasingly impatient and distrustful of each other as their strategies don't work. The stock currently has resistance at the $6 level; look for it to get off to the races if it manages to break through as there will be a massive short covering induced rally that could easily send the stock back to its October-November level.
So why am I so convinced that E-Trade, a firm that still holds some toxic paper, is primed for a major breakout? First of all, there has been very significant insider buying from various executives at an average weighted cost that equals or exceeds current trading prices; I like the fact that management outs their money where their mouth is.
As evidenced by the April activity report, E-trade has been able to retain its retail base throughout this crisis and should be able to gradually regain some of the customers who defected to other brokerages. The company's global trading platform is truly revolutionary and unique as it allows customers to trade in a variety of global markets in local currencies. The firm has more financial flexibility due to the fact that is also operates as a quasi bank, although I do hope they have learned their lesson and will refrain from investing in risky assets from now on. Citadel's $2.5B cash infusion (at $4.78 per share), while being a bit dilutive, provides for a strong floor.
By betting against a company with rapidly improving fundamentals, the shorts are in effect digging their own graves. Analysts have been known to be too 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.
In conclusion, from a risk-reward perspective ETFC looks quite compelling and I look for the stock to break through its resistance at $6 and probably trade back in the mid teens by the end of the year.
Disclosure: Author has a long position in ETFC
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This article has 64 comments:
- Pauly B
- 88 Comments
May 16 08:26 AMI agree, the shorts have overstayed their welcome here.
- Jimmy Goodwin
- 52 Comments
May 16 09:29 AM- Xyrus
- 73 Comments
May 16 09:44 AMA buyout is possible, but unlikely until they shovel more of the garbage off their books, unless they are bought at lower prices to account for the toxicity.
This one would be a wait and see for me.
~X~
- Jimmy Goodwin
- 52 Comments
May 16 09:53 AMWhy would someone invest in a stock which could lose 50% - 100% in a blink of an eye?
- lefty
- 61 Comments
May 16 09:55 AM- igotpaged
- 2 Comments
May 16 10:01 AM- matt7
- 5 Comments
May 16 10:04 AM- Zeninvestor
- 64 Comments
May 16 10:46 AM- rl
- 27 Comments
May 16 11:18 AM- jackooo
- 178 Comments
My Website
May 16 11:35 AMI have pulled one $100,000 plus portfolio because I was not satisfied with customer service. They do not know their jobs and I am continually on the phone trying to set things right. The phone times range from 1/2 hour to a full hour.
Based on their lack of knowledge and lack of expertise I would not venture a buy on their shares.
vbfever1@hotmail.com
- User 194600
- 1 Comment
May 16 11:44 AMYou are looking at a revamped company here with management that seems to know what it is doing. 2 to 3 years from now, with a few purchases under it's belt, it could easily be trading at the high end valuations I have seen, such as 44.00.
- prescient11
- 103 Comments
May 16 11:50 AM- newcomer
- 6 Comments
May 16 11:59 AM- Stockpickerforum
- 25 Comments
May 16 12:28 PMAre you starting to get nervous? You obviously made two comments about the article which quite easily shows that you are short E-Trade and are starting to get a bit more aggressive in your stock pitch. Most overpriced stock?!?!?! Based on what analysis? On how much you've lost by shorting it?!
- SaveTheRupublic
- 20 Comments
May 16 12:36 PM- pshah
- 22 Comments
May 16 12:59 PMIt seems all these long ETFC arguments have some weight but still is a lot of speculation....
- Zeninvestor
- 64 Comments
May 16 01:10 PM- Go US
- 14 Comments
May 16 01:18 PMJimmy was figured out so easily. This stock is Stair stepping and looks to be finding resistance at $4.40. I'm not shure if this puppy has leggs even with new management. Risk Vs reward, by the time investors figure this one out it will be all over. The Feds are pumping tons of cash into the system, and the US $ has been in the can so I figure this stock will hit $12.00/ share by years end.
I am Long on ETFC no suprise!!!
- Jimmy Goodwin
- 52 Comments
May 16 01:22 PMI confess, you got me, I went short on a company going bankrupt but it instead it turned into a google overnight, well, according to Seeking Alpha writers anyway. Or perhaps, I just wanted to say something and there was no edit button.
I just posted because I feel quite angry at SA writers who obviously are telling lies in a desperation to reclaim some of the money back they lost when etrade went bust. Also, I feel sorry for potential investors in etrade who stand to lose upto 95% of their money should the predicted bankruptcy happen, this could happen any moment now! Just stick to the facts.. the company is in deep trouble, the stock is now overpriced and extremely risky. As evident in today's trading when it crashed -7% from its day high because of a little bad news. I can't imagine what will happen when the proper bad news arrives. Etrade investors are just over confident because of this excellent rally we've just had, this is not google or apple, this is a company about to be bancrkupt lol.
- Zeus
- 7 Comments
May 16 02:24 PMThe odds of Etrade trading back to the 2.30 - 2.50 range are slim and none. That was the bottom.
I think the author is also wrong. The truth lies somewhere in the middle.
Etrade should trade higher by year's end, but the idea that this will be a teenager again that soon is ridiculous.
Almost as ridiculous as Jimmy Goodwin's inane prediction.
- Zeus
- 7 Comments
May 16 02:27 PMYOu're obviously on a mission here to trash the stock, which would be acceptable if it came from an intelligent person who could back up their points with some credible comments.
Now, get off the computer before your Mom catches using all of her AOL minutes.
- Zeus
- 7 Comments
May 16 02:33 PMLet's talk truth here, OK? I have placed about 100 calls to Etrade customer service in the past 5 years. I have NEVER - repeat NEVER had to wait as long as 30 minutes or even close to that to have a live human being on the phone.
Out of the 100 or so calls, I have run into about 2 reps that were rude. Any time you deal with a company and only have about 2% rude employees, that is fairly remarkable.
Yes, sometimes their customer service reps don't know an answer, BUT, I also hold an account at OptionsXpress AND TDAmeritrade, and Etrade's customer service and platform are far superior.
Etrade is the best discount brokerage out there.
- Stockpickerforum
- 25 Comments
May 16 02:56 PMI suggest you listen to Zeus, better not upset mommy. I am happy that you are representing the short argument because you reasoning is deeply flawed. I would also suggest asking mommy to sign you up for a few more English classes as you are not able to express yourself in a respectable manner. "I am angry because SA writers are telling lies"...WOW, shows what a smart individual you are...I'm impressed.
- Stockpickerforum
- 25 Comments
May 16 03:05 PMAppreciate your voice of reason and reprimanding of our little Jimmy boy. I completely agree with you on the customer service and Etrade being best of breed comments. You assert quite correctly that Etrade has reached the bottom and should be trading higher by year's end. I do, however, disagree with your assessment of Etrade being unable to trade back to the teens. The past quarter was only midly unprofitable and there is a good chance the company has written down the bulk of its toxic paper losses. Since expectations are so low, all you need is for the firm to report two profitable quarters and this thing will be off to the races. This was in fact a $15 stock in October even after the company's holdings were known and financials collapsed so it would not be preposterous to assume the stock could reclaim these levels if a second half rally in financials will in fact take place. In case ETFC isn't able to report a profitable quarter this year I would agree with your assessment; then the stock would probably trade in the $7-9 range by year's end.
- Go US
- 14 Comments
May 16 03:21 PM- Stockpickerforum
- 25 Comments
May 16 03:33 PMWhat do you mean by short estimate? I would suggest you rephrase your question to make sense. What you said about lenders doesn't make any sense, they used to simply package home loans into pools and then segregate those pools into a variety of tranches...making $ on the spreads. I suggest you read a book about real estate finance.
Your question about short estimate doesn't make any sense. Different investors have different estimates depending on their investment horizons and expectations about future events and earnings. Short sellers usually have shorter time horizons than investors who go long because they are taking on more risk; their potential losses are unlimited.
- Go US
- 14 Comments
May 16 03:49 PMPlease educate me more Lucy!!!
- CJS
- 15 Comments
My Website
May 16 04:58 PMthat being said, etrade did say they were going to double the amount of outstanding shares: caveat emptor.
- Zeninvestor
- 64 Comments
May 16 05:36 PM- John Egan
- 553 Comments
May 16 06:01 PMThe fact that one postee notes that after 500 calls, he has never been put on hold for more then 30 minutes begs the question.. 'Why in God's name should anyone ever have to call them 500 times anyway?'.
I've said it before.. Can't imagine why anyone would buy this stock and in particular why they would hand over real money to these losers.
Thx jegan ;-/
- bodysnatcher
- 1 Comment
May 16 07:00 PMI believe the amount of calls stated was 100 in five years, not 500. That comes out to 20 per year. I call them for various info from trading to mortgage to interest rate info and have had no problems.
If you're waiting for the CEO to call, and he does, please let me know. I'd like to know why he's wasting my dime on customer service instead of doing his job.
Pull up your pants. Your agenda is showing.
- wl
- 4 Comments
May 16 07:07 PM- methusalaw
- 6 Comments
May 16 07:17 PMOn May 16 06:01 PM John Egan wrote:
> I agree wholeheartedly with 'jackaroo' and have left Etrade because
> of the incompetent staff, the worthless replies to my emails, the
> endless waits on the phone with replies that were proven to be incorrect,
> the lack of follow through on their promises, lack of responses to
> my letters to the acting CEO, and their inability to fix any of the
> multitude of problems that they instigated. In fact, dealing with
> ETrade became a part-time job for me.
>
> The fact that one postee notes that after 500 calls, he has never
> been put on hold for more then 30 minutes begs the question.. 'Why
> in God's name should anyone ever have to call them 500 times anyway?'.
>
>
> I've said it before.. Can't imagine why anyone would buy this stock
> and in particular why they would hand over real money to these losers.
>
>
> Thx jegan ;-/
- methusalaw
- 6 Comments
May 16 07:36 PMOn May 16 04:58 PM CJS wrote:
> i seriously doubt this article or any comments are going to move
> the market. no offense to any of the writers; but it is some what
> ridiculous the number of people accusing others of "talking up their
> book" in an effort to regain losses (whether long or short).
>
> that being said, etrade did say they were going to double the amount
> of outstanding shares: caveat emptor.
- methusalaw
- 6 Comments
May 16 08:17 PMI can very well understand your dilemma as an obvious short player. It must be disconcerting that if you were short in the 2s you have already lost 100% of your original investment and are very probably going to loose at least another 200% of that investment unless you cover very quickly. I wish you luck sir since E*Trade going BK extremely unlikely at this point. The measures they have taken to shore up or eliminate their dept and troubled loans, their access to federal funds, the authorization to issue additional shares if US markets degrade to point of taking out most all financial institutions will ensure their survival. E*Trade is well ahead of the recovery plans reiterated only a month ago in the 1Q review. This stock will at minimum be a 7-9 dollar and more probably 10-15 dollar stock by 1Q of 2009. You sir know and those who are long this stock know it.
I'm long this stock and also a customer of the company and attest to the great service and platform for the profession or non-professional online investor.
- VP of Common Sense
- 59 Comments
May 16 09:58 PM- Rafael Grillo
- 20 Comments
My Website
May 16 11:13 PM- Jimmy Goodwin
- 52 Comments
May 17 05:55 AMIt doesn't matter how they go bankrupt, you will lose your money. I only hope the optimistic fools investing in Etrade can afford such a large financial loss. Just remember, its not smart to piss against the wind.
- User 194936
- 1 Comment
My Website
May 17 09:27 AMbefore Etrade bought them out.
So far, I am extremely satisfied with the service.
I do not call too often, but when I do, there is no waiting
and my inquiries are answered promptly and courtesly.
Currently, I am 100% in natural resource stocks; but as I
start cutting down on my exposure, I will be swithing over
to ETFC.
I think they have the best trading platform in cyberspace.
IMHO.
Agman.
- Medici
- 50 Comments
My Website
May 17 11:25 AM- wl
- 4 Comments
May 17 07:37 PM- BAGWHAN
- 1 Comment
May 17 10:00 PM- Long time Etrade Customer
- 8 Comments
May 18 08:16 AM- Daneric40
- 8 Comments
May 18 03:53 PMThey fully realize that their stock price is the one thing they must protect. Not just because they all have personal stakes in it, but the stock price is what will help drive people either toward or away as customers.
The $2 mark was a panic low-water mark. You won't see that price again and as more time goes on the safer they are. Yes they are in debt, but they are fully aware and have revealed it more forthcoming than Citi or WM. They have a plan to pay it and as long as their online trading business grows at a decent pace, they will survive.
Their asset sales will not hurt their core business:online trading.
Look for a small profit next quarterly earnings report. They will beat expectations and then the price will take off and that is when the shorts will be burned. Management is working all this summer with that goal in mind.
And if they have another good monthly customer report that again beats expectations, you could see a panic occur earlier.
The CEO is an ex-JP Morgan guy and turning ETRADE back into what it was has been a holy-grail quest of his and he won't take failure as a result.
Gaining the approval of shareholders in the authorization of more stock is necessary step that has most likely been planned from back in the dark days. Remember, they must protect the price and perception of their stock so they have waited 6 months and a stabilization in stock price to announce it. ALso note that it was announced Friday after market and it was coupled with the announcement of them selling an Indian asset that will net them $millions.
Its all about managing the stock price and they had to eventually announce additional shares.
1. Insider buys 50K at $3.72
2. Quarterly report comes out and CEO is positive.
3. New trading center opens in Toronto (expansion)
4. April Monthly customer trades beats expectations.
4. Selling assets nets $Millions coupled with market closing annnouncement on a Friday about doubling shares.
That is smart management right there! They have planned and dribbled positive news and timed the potential negative news of the authorization of issuance of stock rather adroitly if you ask me.
Its impact will be negligble. The price will probably retreat back down to $4, but hey guess what, I am betting management has sandwiched more good news that will come out this week to come.
They are hitting all the right notes. Etrade will be a $10 stock by Christmas even as they will still carry a good bit of debt. Won't matter because the direction forward will be bright, and online trading is a growing business.
- Daneric40
- 8 Comments
May 18 04:11 PMEverybody loves a *Rocky* story. Etrade is slowly becoming just that. And expect ETRADE to take advantage of that perception in marketing thmselves to investors in the future.
They are getting buzz on the talking heads shows bceause it is a feel-good story. Don't underestimate this aspect.
I would never short Rocky Balboa as he picks himself off the canvas in the 15th round and throws some haymakers and wins in the end by TKO.
One more thing about CEO Layton. They recruited him from the board of directors and he had never intended to come out of retirement. But he did come out and they obviously gave him a free (and powerful) hand to do whatever is necessary to include canning all the old guard. He got the rest to buy into his leadership and he is like a god in that place at the moment. If he pulsl this thing off, it will be studied by Wall Street for decades to come.
Like I said, everyone loves a Rocky story. I bet CEO Layton does too.
- curious cat
- 125 Comments
My Website
May 18 07:27 PMi am not currently long or short, but i am examining my options.
- Ben Williams
- 31 Comments
May 19 03:14 PM- Jimmy Goodwin
- 52 Comments
May 19 04:08 PM- oregonduck
- 93 Comments
May 19 08:18 PMI have 15,000 shares now with an average price of 4.08. Feeling pretty good.
- oregonduck
- 93 Comments
May 19 08:36 PMAlso, when I hear about the complaints about etrades service, that has nothing to do about the stock price. A complaint about one persons interaction with a customer service will not effect etrade--just like my conversation with a chase credit card customer service person would effect JP morgan stock. The reality is that analysts will effect the overall moves in the stock, and that will be effected by numbers. Balance sheets are what they look at. Balance sheets are being shorn up today by etrade. The stock deals that were made today, where debt was converted into stock, and where an Indian company was sold for net cash--and tax liabilities were eliminated, all were made to effect the balance sheet. That will come into effect for the next quarters reports and will get analysts attentions. That will bring the stock price up, add market capitalization, and make the company healthy again.
Its amazing how liberating a scare be to a company and how weathy it can make patient stockholders. Patience.....Patience....
- matt7
- 5 Comments
May 20 11:44 AM- Go US
- 14 Comments
May 20 12:35 PMAs far as customer service ETrade has the right people and really good service, I spent a half hour with one rep working on tax stuff IRAs and the like and shifting cash around she was great and she made it happen.... I was very impressed!!!! GO ETRADE GO.
I am very LONG on this stock
- Pfloyd234
- 63 Comments
May 20 12:57 PM