E-Trade Financial Carries High Risk-Reward

| About: E*TRADE Financial (ETFC)

E-Trade Financial (NASDAQ:ETFC) has had its share of problems. A few years back, E-Trade was the biggest competitor to TD Ameritrade (NASDAQ:AMTD) and the stock traded together with the brokerage stocks. Yet, since the mortgage headlines began to hit the wires last year, the stock has dropped from $23 to $3 today. In fact, the stock hit $2.25 back in January of this year. In other words, the stock has been hit like it were a Countrywide.

What the market might have overlooked is that ETFC's primary line of business has been its trading business. In fact, the number of net new retail accounts in July totaled 19,583. Total number of accounts is now at over 4.4 million. Total retail customer assets are at $162 billion at the end of July.

Having said that, the company did report a net loss of $94.6 million, or 19 cents per share, due to loan delinquencies. That compares with a profit of $159.1 million, or 37 cents per share a year earlier.

Make no mistake, TD Ameritrade is a better run company, with good earnings, no mortgage or credit risk, and a lower amount of debt. But that is exactly the reason E-Trade is a more compelling stock. It has managed its business horribly by moving away from its core business of online trading and involving itself in mortgages and has been slow to react to the situation it has found itself in. With all the wrong moves, there is hardly anything else that it can do wrong.

In terms of what E-Trade is doing to turn itself around - it is setting aside $100 million for mortgage losses, hax reduced the available credit lines on existing home equity lines of credit, shedding its investment in Fannie and Freddie, and focusing on growth in the online trading business.

The company has some ways to go before the turn-around is complete. Meanwhile, the stock carries plenty of headline risk. However, I believe that among the financials, it carries one of the highest risk-reward. If you take out its mortgage-based business (losses), the stock deserves a higher price and patient investors will be rewarded sooner or later.

Full Disclosure: I own ETFC but my position can change anytime without notice.