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ETrade Financial Stock

The last few years haven't been easy for online brokers. With more and more people looking for safer investments than stocks, the online brokers are seeing their trading volumes dwindle. And with fewer people making trades, it gives the online brokers lower revenues.But despite this, I think there are still a few brokerage stocks that are appealing. One of these is E*Trade Financial. As a few of you remember, E*Trade hit an all-time high of $62/share in early 1999. Since then, it has seen its stock drop to its current level of $5.70/share.The biggest reason for this is the hurting economy. With fewer people investing, E*Trade has seen a drop in their revenues. However, because they have branched out to other financial arenas (online banking, ATM's, etc..), they have been able to keep the company financially healthy. And by taking their focus off the online brokerage sector, they have been able to remain profitable by focusing on other key business models.

That's not to say that they aren't an online broker anymore. They still are and it still accounts for a lot of their revenues. But they have positioned themselves so that a downturn in the economy won't wreck the company. In fact, analysts are forecasting a profit of $0.45/share for 2002. This means that E*Trade is currently valued at 12.7x FY2002 earnings.What I Like About the Stock

  • It's positioned for a turnaround - with trading volume at pretty low levels, I feel that the stock has hit a bottom. Any turnaround in the economy or stock market will greatly increase the company's top and bottom lines.
  • It's not a bad long-term investment - because they have taken measures to diversify their business operations, I think that even if the market doesn't recover now, the company will still remain strong for the next couple years.
  • Consistently good earnings - E*Trade has met or beet analysts' estimates for the last 4 quarters. This is a sign that the company can evolve to meet the current economic conditions.What I Don't Like About the Stock
  • Debt - I don't like the levels of debt that E*Trade has taken on. They currently have $4 billion worth of debt and this can hinder their growth in the future
  • Volatile - The stock has been very volatile over the last year and a half. It staged a rally from $5/share to $15/share and then back down to $5/share. This gives it a beta relative to the market of 3.74 so it's a pretty risky stock.
  • All in all, I think E*Trade is very attractive at these levels. However, don't be surprised if it drops as low as $5.00/share. But for the most part, I think the stock has reached a bottom and has very interesting upside potential. I see the stock reaching $10.00/share in the next two years.

     

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