Has E*TRADE Been Outplayed Again?

With shares of E*TRADE FINANCIAL CORPORATION (NASDAQ:ETFC) trading at around $9.55, is ETFC an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

E*TRADE has had its share of missteps in the past. It’s possible that those missteps have led the company to being gun shy. We don’t see much innovation out of E*TRADE anymore. Based on past results, that might be a positive. However, if the company continues to rely on the current business model without innovating, then it will continue to underperform TD Ameritrade Holding Corporation (NASDAQ:AMTD).

TD Ameritrade has launched its own investor sentiment index, which will be called the Investor Movement Index, or IMX. It will measure the risk appetite of investors and traders who have at least $2,000 in their account and trade at least once per month. The index will also read the most and least popular stocks. The IMX will be published monthly. TD Ameritrade is hoping that the IMX will become more important than consumer sentiment because it’s based on actual trades. This isn’t going to hurt E*TRADE at the present time, but it’s a sign that TD Ameritrade will continuously look for ways to grow. If E*TRADE continues to sit still, then it will be left in the dust.

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On the positive side, E*TRADE has been attracting and retaining customers who actively trade and invest. E*TRADE is also taking a focused approach at improving the balance sheet.

Let’s take a look at some important numbers for E*TRADE and see if it’s a good time to pounce.

E = Equity to Debt Ratio Is Weak

The debt-to-equity ratio for E*TRADE is much higher than the industry average. However, the balance sheet is positive.   

Debt-To-Equity

Cash

Long-Term Debt

ETFC

1.66

$4.37 Billion

$3.83 Billion

SCHW

0.19

$33.56 Billion

$1.78 Billion

AMTD

0.31

$5.10 Billion

$1.35 Billion

 

T = Technicals on the Stock Chart Are Improving

E*TRADE has performed poorly over a three-year time frame, but the past year has been stronger. That said, E*TRADE was still outperformed by TD Ameritrade and The Charles Schwab Corporation (NYSE:SCHW).

1 Month

Year-To-Date

1 Year

3 Year

ETFC

14.92%

6.70%

7.55%

-46.94%

SCHW

14.58%

6.69%

26.75%

-16.06%

AMTD

14.71%

8.27%

12.11%

0.41%

 

At $9.55, E*TRADE is currently trading above all its averages.

50-Day SMA

8.50

100-Day SMA

8.70

200-Day SMA

8.79

 

E = Earnings Have Been Improving

Earnings have been improving, which should be expected since they were coming from the depths of hell. Revenue, on the other hand, has been inconsistent.

2007

2008

2009

2010

2011

Revenue ($)in billions

2.10

3.13

2.79

2.40

2.35

Diluted EPS ($)

-34.00

-10.04

-11.85

-0.13

0.54

 

When we look at the last quarter on a YoY basis, we see a decrease in revenue and earnings.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in millions

585.40

552.27

566.81

527.82

563.14

Diluted EPS ($)

0.24

-0.02

0.22

0.14

-0.10

 

T = Trends Support the Industry

Trends support the industry right now, but that could change in an instant. This industry performs well when the economy is humming. Or, should I say, when the stock market is humming. That has been the case over the past few years. Just be careful. We’re living in a bubble economy. If you look at the big picture, the boom/bust trend began with the tech bubble. In order to aid the economy back to recovery, Alan Greenspan lowered interest rates to unfathomable levels. This, in turn, fueled the housing bubble. The housing bubble then popped, which led to a chain reaction through the overall economy, including the stock market. Ben Bernanke then took the same approach Greenspan did, which was to lower interest rates to unfathomable levels in order to aid economic recovery. This has led to a cheap money era and a bubble in the stock market. It’s likely that the bubble has plenty of room to expand. In other words, the bull run could last for a while, but it won’t last forever. Therefore, stocks like E*TRADE should be looked at as more of a trade than an investment.  

Conclusion

E*TRADE has been improving its debt situation, but it’s difficult to find sustainable areas of growth. There has been bullish option activity as of late, but the short position is also relatively high at 6.50 percent. These signals are contradictory.  

E*TRADE definitely has upside potential, but there is too much risk for a bullish recommendation. E*TRADE is currently a neutral WAIT AND SEE.

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