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Has E*TRADE Financial Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if E*TRADE Financial (Nasdaq: ETFC  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at E*TRADE Financial.


What We Want to See


Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% (7.7%) Fail
  1-Year Revenue Growth > 12% 46.3% Pass
Margins Gross Margin > 35% 88.8% Pass
  Net Margin > 15% 5.8% Fail
Balance Sheet Debt to Equity < 50% 199.7% Fail
  Current Ratio > 1.3 2.20 Pass
Opportunities Return on Equity > 15% 1.7% Fail
Valuation Normalized P/E < 20 21.12 Fail
Dividends Current Yield > 2% 0% Fail
  5-Year Dividend Growth > 10% 0% Fail
  Total Score   3 out of 10

Source: Capital IQ, a division of Standard & Poor's. Total score = number of passes.

When we looked at E*TRADE Financial last year, it had a score of 4, so the company has slid a bit. A drop in normalized earnings has pushed the online broker's multiple above 20, despite poor performance from the stock since late 2010.

Times have been tough for discount brokers. In their most recent quarters, E*TRADE, Schwab (NYSE: SCHW  ) , and TD AMERITRADE (Nasdaq: AMTD  ) all saw average trades fall by double-digit percentages from last year's levels. That has once again raised the specter of consolidation within the industry.

But E*TRADE has its own unique problems. As a result of its foray into mortgage lending, the company has had to overcome delinquent loans. But like traditional lenders US Bancorp (NYSE: USB  ) and SunTrust (NYSE: STI  ) , E*TRADE has seen its delinquency rates continue to drop substantially.

Partly in response to pressure from hedge fund investor Citadel, which is E*TRADE's largest shareholder, E*TRADE has started to explore strategic alternatives -- Street-speak for putting itself up for sale. The logical buyer is TD Ameritrade, but so far, neither company has announced impending nuptials just yet.

Although it has made progress coming back from the financial crisis, E*TRADE has a lot of work to do to approach perfection. Before that happens, the company might well find itself the target of a hungry competitor.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add E*TRADE Financial to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. Motley Fool newsletter services have recommended buying shares of Schwab. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

Read/Post Comments (3) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 30, 2011, at 4:31 PM, gregandmelinda wrote:

    The trading system often fails. The system was down for hours today. Investors could not buy or sell. For active traders or when you need to do a quick trade, their telephone system is useless. It takes several minutes to place an order by phone because of all the numbers that you must punch in. I was on hold for 45 minutes before I could speak to someone.

  • Report this Comment On September 30, 2011, at 4:55 PM, gregandmelinda wrote:

    :TD AMERITRADE (Nasdaq: AMTD ) all saw average trades fall by double-digit percentages from last year's levels..." It is no wonder. Their fees are high. It appears that they do not have a second trading system when their first system fails. When you lose thousands of dollars because of their failures, they don't seem to care. They may offer you a few free trades, but that is pennies on the dollar to some traders. Investors need to connect the SEC and Consumer Reports and make the truth known about this company.

  • Report this Comment On October 01, 2011, at 12:34 AM, gregandmelinda wrote:

    Both of my posts are directed to TD Ameritrade, not E*TRADE. All the firms that you had mentioned are better than Ameritrade. They care about their clients. I have traded with most and Ameritrade is a firm to avoid.

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ETFC $28.09 Down -0.77 -2.67%
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