E*Trade: Expect a Takeover Any Day Now

Includes: AMTD, ETFC, SCHW
by: Jeremy Richards

E*TRADE Financial (NASDAQ: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.

GS said that, despite expected rising credit losses at ETFC, which it sees increasing to up to $1.6 billion, it expects improving trends in the firm's home-equity-loan book and says the worst provisioning appears to be over for its mortgage and home-equity loans.

ETFC is now a buy say the top analysts, so if you're selling under $2 and not buying you will miss out. I believe the upside is over 100% regardless of a takeover. ETFC current stock price doesn't reflect the 3 analysts upgrades last week. In my opinion, investors have a chance to buy shares cheap at the current range.

Analysts believe a takeover is more than likely to happen. Citigroup's Keith Walsh noted last week that ETFC's main brokerage business remains healthy, with stronger growth in customer accounts than TD Ameritrade (NASDAQ:AMTD) and Charles Schwab (NYSE:SCHW). As ETFC mortgage portfolio stabilizes, the company may be acquired by one of these rivals, Walsh said.

"Competitors AMTD and SCHW have both made public comments about the attractiveness of E-Trade's 2.7 million brokerage accounts." The analyst upgraded ETFC to buy from hold and raised the price target from $1.50 to $2.30.

ETFC is gaining brokerage accounts faster than any other brokerage out there with a 138 percent increase in year-over-year new accounts. SCHW and AMTD need to hurry up and grab ETFC before this is back above $5, and I bet it will be come this time next year with its mortgage loan portfolio now stable.

ETFC sold 80.2 million shares in a so-called "at the market," or ATM, offering. This method of raising capital allows a company to sell new shares at the prices prevailing in the open market, as opposed to a secondary offering, in which the company sells stock to a group of institutional investors at an agreed-upon price, usually a discount to where the stock is trading. The New York-based online brokerage said the offering had gross proceeds of $150 million. Sandler O'Neill & Partners acted as the sole distribution agent for the offering.The average price was $1.87 a share.

Shorts will take a massive risk holding short over night. Any morning ETFC could get an offer from $3 to $4 a share or maybe more. ETFC is a now a turn around play. ETFC is well below fair value of $2.70 a share based on book value.

ETFC board of directors scrapped a Stockholder Rights Plan that was essentially a "poison pill" set up in 2001 to prevent a hostile takeover of the company.

"The Rights Plan elimination improves corporate governance, while also increasing the likelihood of the company's eventual acquisition," said Matthew Albrecht, a financials analyst at Standard & Poor's Equity Research.

Think about it? Goldman Sachs suggesting clients BUY ETFC, I bet this will soon be above the $2.30 target. Good luck and don't be tricked into selling.

Disclosure: Long ETFC, GS, AMTD