First a couple of definitions:
The 'magic moment': When a turnaround stock starts to turn vertical, pros call it 'getting re-rated'.
The catalyst(s): Simple, fundamental improvements in businesses (but before the 'magic moment' dawns on the stock price, invisible)
So WHEN is the magic moment? Generally, it's when:
A) the company reports a profit after losses, or
B) the company's cash flows have improved so much that it finally can use its internal cash to pay down debt and/or buy back stocks, or
C) the company's analysts support business actions and trends with positive commentary.
If A), B), and C) -- it's the most powerful combination in the marketplace.
With that in mind, when will the MAGIC moment occur for E*Trade (ETFC)?
E*Trade is well on its way to accumulating its year end target of $1 billion excess cash for a safety cushion (a key difference between Layton and the old CEO: in business, you just can't spend your last dollar on your greatest idea(s)). The environment is improving, that's good, but a safety net is called a safety net for a reason . . . so even though buying back stocks and bonds would be great right now the safety net is more critical.
Recent reports on the liquidation of non-core assets and the execution of 10% cost savings would indicate this $1 billion target will be reached well ahead of schedule, almost certainly by October (Q3) and very likely by the end of July (Q2).
Target cash achievements to date:
i) They already accumulated $695m as of Q1
ii) The pool went up by $260m in one quarter
iii) Now E*Trade is accelerating its non-core assets sale program including selling, last week, its stake in the India venture to HSBC for $145m.
After the $1 billion target is reached, any extra excess cash can be spent on debt/stock buybacks. Both will be accretive to shareholders, which should be the focus, depending on where the prices are by then. At current prices, both E*Trade Stock and Bonds are steals: bonds yielding some 11% and stocks at barely 2x normalized operating earnings. That’s right, barely 2x E*Trade's Online Brokerage arm's income.
In May, The New York Times published an article entitled “A Wish List for Fixing Wall Street,” which highlights Kenneth Griffin’s (Citadel Investment Group founder) insights for Wall Street. It is easy to see that with Citadel and Mr. Griffin providing the financial foundation and direction for E*Trade’s progress, the timing for E*Trade’s MAGIC Moment will most likely be sooner instead of later.
Note: Edited from materials written by Numbersssss
Disclosure: Author has a long position in ETFC