E*Trade (ETFC) is just 3 trading days away from its earnings report. Next week will be exciting for investors. I shall stick to my guns and stay invested in both my own account and the fund I manage.

I believe ETFC is very undervalued. When I look for undervalued stocks, I look at the Price/Sales ratio which should be below 1.5 to be undervalued and below 0.75 to be very undervalued. ETFC's Price/Sales ratio is just 0.66, based on trailing 12 month sales. TDAmeritrade (AMTD) has a P/S ratio of 4.93 based on trailing 12 month sales. Charles Schwab (SCHW) has a P/S ratio of 4.79 based on trailing 12 month sales

E*Trade (ETFC) has earnings due on the 27th of this month. I will hold my position as I believe ETFC will beat the current $0.08 loss estimate. Analysts should reiterate buy ratings and likely raise estimates. Investors could see ETFC stock price trade over $2 a share after the earnings report.

On September 24th, ETFC one month by daily candlestick chart had turned bearish when using technical indicators. As per ETFC $1.79 close on Thursday, the chart has turned bullish and given a buy signal with strong money flow moving in. ETFC stock price should trend into the high $1.80 to low $1.90 area over the next 5 trading days as per my chart program.

E*TRADE Financial (ETFC) stock price is now in the $1.70 range after trading at $2.08 this week. The price drop may very well be a shake out to accumulate shares as a takeover could be in the works. ETFC had many analyst upgrades; last week with big dog Goldman Sachs raised its rating on the stock to buy with a $2.30 target and said the firm is putting its credit problems in the rearview mirror as trading revs up.

GS analysts last Friday suggested clients buy ETFC shares after the company reported strong client trading during August.

E*Trade (ETFC). Analysts believe it's now undervalued after trading near $2 less than a month ago. Now at $1.84, ETFC may soon receive a buyout offer. The people I speak with guess $3 to $4 a share will be the offer and could come any day. A few years ago analysts said ETFC could fetch between $10-$11 per share on a buyout deal. Now the book value is about $2.70 a share. Cost savings to an AMTD bottom line of a merger make a lot of sense. ETFC CEO Donald Layton will step down at the end of the year. The poison pill is out; this makes a takeover very easy.

September 18, 2009

Level 3 (LVLT) poised for major broadband demand. A bullish analyst view from Mike Sapien, a principal analyst for Ovum, a telecommunications, software and IT analysis company with offices worldwide.

As a result of LVLT's nine acquisitions in the last five years, the company not only supplies fiber optics network infrastructure to companies like Comcast Corp. (CMCSA), AT&T Inc. (T), Sprint Nextel Corp. (S) and EarthLink Inc. (ELNK), but it is moving into the "enterprise" sector, which LVLT calls its Business Markets Group.

If you waited for the opportunity to buy E*Trade (ETFC) at a discount, now is your chance and it might not last long. I expect ETFC will trend back to its 50 Day moving average of $1.55 very soon.

New purchase from ETFC Insider Weaver Donna L bought 100,000 shares on the open market at $1.22 a share.

E-Trade's (ETFC) capital restructuring announcement is very welcome news. Although the stock sold off irrationally, the fact that ETFC's bond rallied to 98.5 reaffirms that ETFC is turning the corner.

The risk of default is significantly decreasing and ETFC is on its way to increasing capital ratios, reducing balance sheet risk, and significantly reducing its debt burden. Key points to consider regarding ETFC are as follows:

I expect E*Trade Financial (ETFC) stock price to trend into the mid $2 range this week. More upside is likely as investors are betting on two positive numbers to emerge this week :

1) Brokerage numbers for May and

E*TRADE Financial Corporation (ETFC) looks likea buy based on chart technicals. The one month by daily chart macd indicator is giving a buy signal and the three month by weekly slow stochastic chart indicator is bullish turning up from the oversold mark. Relative price strength is increasing. I believe a new up trend is starting and buying the stock at the current price of $1.46 a share offers very good upside reward over both the near and long term. I expect the stock price to trend back into the mid $2 range over next 1 to 3 months.

ETFC's cash position has grown significantly over the past few quarters and their long term and short term debt has decreased. Additionally they are showing reduced delinquency in their higher risk home equity loans.

Level 3 Communications (LVLT) just had its annual meeting this week and it went very well.

Chief executive Jim Crowe, said the company's financial performance is on track to improve with increased cash flow and lower debt ratios.

American International Group, Inc. (AIG) could very well rally above $2 this week. May options show the $2 calls are currently trading at $0.14 and Jun $2 calls trading at $0.29. AIG chart technicals are showing very bullish money flow with the macd indicator on the 1 month chart giving a buy signal.

AIG is expected to post a first-quarter loss on Thursday. A source that has declined to be named says the loss in the first quarter is expected to be significantly lower than its fourth-quarter loss of $61.7 billion, adding that AIG will not need a capital injection from the U.S. government.

Level 3 Communications (LVLT) looks ready for a large move to the upside. The share price could double or more over the next 3 to 6 months. Earnings are due next week and I expect LVLT will beat estimates and guide upward. Institutions own 80% of the float and added 4.5 M shares last week above $1.15. LVLT has 140M shares short or about 10% of the float and a short squeeze could drive the share price over $1.50 come next week.

Some Positive Notes:

Dan Rayburn, a Principal Analyst with Frost & Sullivan, says Level 3's (LVLT) content delivery network business is winning deals and could come in at $100M, which is double his estimates, thanks to deals with Comcast (CMCSA), Microsoft (MSFT), Netflix (NFLX), Fox (NWS), Yahoo (YHOO), and others.

After hitting a high of $2.85 this week, 3Com (COMS) pulled back over 20%, mostly on Cisco (CSCO)-related pessimism. But, 3Com sees no slowing on its earnings and cash flow. In fact, 3Com has beat analyst estimates the last 4 consecutive quarters by an average of 95%! Cisco trades at 11.5 times forward P/E, while 3Com only trades at 5.7 times forward P/E. Per Vectorvest, the forecast growth rate on 3Com is 25% while Cisco is only 3%. Thus, in terms of valuation, 3Com represents a tremendous value within the sector.

3Com is a leading global provider of enterprise and small-business networking solutions. From its 2007 acquisition of 100 percent ownership of H3C Technologies Co., Limited (H3C), 3Com today has a leading market presence in China, and a significant networking market share in Europe, Asia, and the Americas .

The Offer

On Wednesday, October 1, ON Semi (ONNN) and Microchip Technology (MCHP) sent a letter to Atmel (ATML) outlining their all-cash $5 a share bid, which is led by Microchip and represents over a 50% premium to Atmel's closing price of $3.36 on Friday, Oct. 25. The acquisition would be financed in part by the sale of Atmel's nonvolatile memory and radio frequency and automotive businesses to ON Semi, the letter said. Although not a condition to the offer, Microchip said it intends to sell Atmel's Application-Specific Integrated Cicuit business after the acquisition is complete. Microchip said there is already a third-party interested in acquiring it.

Blockbuster (BBI) looks massively undervalued. The current share price of $1.15 doesn't reflect the fair value. BBI is trading at a forward PE of 3.5 which is 4 x less than the average P/E of the S&P500. BBI trades at less than 1/2 its book value of $2.69 and the price to sales ratio is amazingly low at only 0.05. Competitor Netflix (NFLX) is trading at almost 4x its book value of $5.69 at a share price of $18.95, and trades at 1 x sales and has a forward P/E ratio of 12.9.

On Wednesday the BBI share price rallied from a low of $1.16 to a high of $1.50 per share and closed up 10% at $1.32 in a down market day. The reason for the rally was that BBI gave investors a bullish earnings update, due out Nov 6, 2008.

In my last Sanmina (SANM) article on July 15th, the share price was around $1.10 and then moved to a high of $2.66, which proved to be considerably more than the 50% move I predicted. At the time of my article, SANM had $1.63 cash per share. It now has $1.84 per share. Over the same time period, the book value is up to $2.24 from $2.18.

Capstone Turbine Corporation (CPST) develops, manufactures, markets and services microturbine technology solutions for use in stationary distributed power generation. CPST's share price started the year at $1.63 and hit a high of $4.42, but it has sunk down to just $1.21 and offers a major buying opportunity.

As per its latest 10-Q filing, CPST has no long-term debt and has about $32 million cash on hand [Ed.: This is corrected from an earlier, incorrect version.]. CPST also has a yearly growth rate of 37%.

Is Microsoft (MSFT) ready to take a stake in SiriusXM (SIRI)? Some think so.

Former European equities analyst and now research consultant Ben McClure noted:

 Last week I wrote about Finisar (FNSR) and gathered it would be smart for JDS Uniphase (JDSU) to buy/merge with them. This weekend I spoke with a source that read my article and works in the sector. He asked me to take a look at Bookham (BKHM) as another acquisition target in the same space. Although I am not sure of it, he believes an offer around $2 per share is on the way. 

So after taking a look, here is what I have found. BKHM is in the same sector as FNSR but failed to rally on Friday along with the herd. I dug deep but couldn't find any reason for the stock price to be so cheap. First of all, BKHM has big clients such as Ciena (CIEN), which uses BKHM's products. This is a testament to the quality of BKHM's products. Second, looking at the balance sheet, BKHM stands out with ZERO debt and trades below book value of $1.49, which makes it more of a value play than others in the group. Finally, BKHM is hugely undervalued, trading with a Forward P/E of 18 and just 0.4x sales with a growth rate of 39%. The growth rate is almost four times that of JDSU and twice that of FNSR, which was my favorite in the group. But now, BKHM, at the current stock price of $1.18, is far too good of a bargain to pass up. 

CIENA Corp. (CIEN) looks undervalued with about $11 a share cash on hand, and trades at about the same price.  The company has a book value of  $11.28 a share, trades at a forward P/E ratio of 15.5 and trades at 1x sales.

11 analysts cover CIEN with price targets that range from $12 to $24 a share with an average target of $15.