Why Is E*Trade a $2 Stock?

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If E*Trade's (Nasdaq: ETFC  ) stock was legal tender it would take two shares to buy a Big Mac sandwich, five shares to cover the broker's cheapest stock commission, and nearly 2 million shares to cover another E*Trade Baby commercial slot during next year's Super Bowl.

It's cruel math, but what else can one say when even the E*Trade Baby's age has probably passed the discount broker's share price?

This has to be frustrating for investors because the company's metrics are refreshingly solid. This morning's monthly activity update for April is inspiring. E*Trade ended the month with a record 4.5 million accounts, closing out April with 32,550 more brokerage accounts than when it started.

Sure, E*Trade's net banking accounts shrank by 6,677 last month, but it's hard to promote online banking when interest rates are falling. During the first quarter alone, the company's flagship Complete Savings Account (CSA) vehicle has gone from yielding a healthy 3.01% to a more pedestrian 1.54% rate. As for this morning, the yield has shrunk to a mere 0.95%. Money market rates have taken a hit all over, but it's less compelling to transfer out of a bank to "chase" a payout of less than 1%, even if it is five times the national average.

Either way this is a brokerage growth story, and April rocked on that front. With 230,345 daily average revenue trades last month -- up nearly 35% from last April and a respectable 7% uptick from March -- the flurry of trading activity is E*Trade's friend. The firm has had seven consecutive months of net inflows, with $300 million in net new customer assets in April.

Then reality hits you like bird poop falling on a shady park bench. Analysts see an entirely different E*Trade. They see losses widening this quarter, unlike the consistent profitability investors find in larger rivals Charles Schwab (Nasdaq: SCHW  ) and TD AMERITRADE (Nasdaq: AMTD  ) . Even smaller niche specialists like optionsXpress (Nasdaq: OXPS  ) and thinkorswim (Nasdaq: SWIM  ) are routinely in the black.

April's strong start will naturally lead shareholders to bet on E*Trade outsmarting its pessimistic analysts, but that trend isn't kind. The company has posted wider-than-expected losses in each of the past six quarters.

Sure, E*Trade is cool. It has a winning marketing schtick with the E*Trade Baby. It is ahead of the curve in rolling out smartphone apps for Apple (Nasdaq: AAPL  ) iPhone and Research In Motion (Nasdaq: RIMM  ) BlackBerry jockeys. However, its stock is smarting because its income statement hasn't been able to keep its end of the bargain.

A few more months like April, and E*Trade will be able to change that. Until then, though, it will have to enviously watch Schwab and AMERITRADE frolic in the teens without it.

In the market for a new discount broker? The way that rates and initial deposits are bouncing around, I can't say that I blame you. Check the sponsored broker comparison table in the Discount Broker Center to see if you can find the bargain-minded brokerage outfit that's right for you.

Apple, optionsXpress, and Charles Schwab are Motley Fool Stock Advisor selections. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz believes in self-service gasoline pumps and self-service stock brokerages. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.

Read/Post Comments (11) | Recommend This Article (52)

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 May 13, 2009, at 5:06 PM, FinancialFellow wrote:

    I thoroughly enjoyed the bird poop on a shady park bench reference. I think there's too much competition in the online brokerage market. The bigger, more established, online brokers like E-Trade and TD Ameritrade are being undercut by the companies that offer cheaper online trading like TradeKing and Zecco. Scottrade was one of the first discount online brokers to cut into E-Trade and TD Ameritrade, however, even they are being undercut by the Zecco's and TradeKing's now:

  • Report this Comment On May 13, 2009, at 5:15 PM, mpendragon wrote:

    The buy-and-hold strategy is common wisdom that's commonly ignored and E*Trade's business is driven largely by investors who make a large number of trades. They should do well in a volatile market with high volume except they lack any real competitive advantage over their competition that I'm aware of.

  • Report this Comment On May 13, 2009, at 8:54 PM, HectorLemans wrote:

    E*Trade is the poster child for how not to run a company. Heavy advertising and expanding just before the dot-com bubble burst? Check. Expanding into mortgages at the peak of the housing bubble? Check. I find it a bit funny...sad but funny. I actually love their site and have 4 accounts and thousands of dollars with them. But I wouldn't buy one share of their stock.

  • Report this Comment On May 14, 2009, at 4:28 AM, Netteligent09 wrote:

    ETrade needs new management and Board of Directors in place with working hard, conservative, technology savvy and service oriented team. Stop making quick money. Drugs are lucrative business but it is not good for E-Trade. Few steps at a time.

    Focus on customers, not Analysts. These loudmouth Analysts are only interested to make quick money in short term. Keeping a respected distance from them. Investors will come when they see progress.

  • Report this Comment On May 14, 2009, at 6:22 AM, sdansker wrote:

    If it weren't for the disfunctional governmental units that, on one hand, say that ETrade needs more reserves and on the other hand stalls giving ETrade a TARP low-interest loan, ETFC would be trading at a much higher price. The Feds say "delever" their high interest laons, then stall on giving them TARP funds. This is diabolical!

  • Report this Comment On May 15, 2009, at 3:48 AM, kamuirei wrote:

    They can't be doing that well considering they just closed all their house mutual funds.... Schwab on the other hand just lowered the fees on many of theirs.

  • Report this Comment On May 15, 2009, at 3:49 AM, kamuirei wrote:

    note: I use both

  • Report this Comment On May 17, 2009, at 1:30 PM, wberg wrote:

    This is a ridiculous article that completely misses the point about why ETFC's stock price ranges from $1 to $2 a share.....E*Trade Bank is insolvent. End of story. ETFC has approximately $50Bn of total assets, of which nearly half consist of loans that were originted or purchased by E*Trade Bank. ETFC (your boy Mitch Caplan) made the disasterous decision to drive much of its earnings and asset growth (and ROE growth) during the past several years by building out E*Trade Bank. The way it did this was often by purchasing 3rd party originated loans (meaning they were underwritten by another financial institution). Bad strategy. Most of these loans were and are pieces of junk (residential mortgages and home equity loans) that are going to continue to result in elevated loan loss provisioning, higher non performing loan balances, and more charge-offs. E*Trade's consolidated net losses are being driven by the complete meltdown at E*Trade Bank. In fact, if the writer of this article spent 15 minutes combing through the 10-K, he would see the problem clearly: at 12/31/08, all of E*Trade's domestic and international broker dealer subs had $800MM of regulatory net capital (same thing as equity). So, if we know that ETFC's broker dealer subs combined are worth at least $800MM, then why is ETFC's market cap in the range of $800MM. Because E*Trade Bank is insolvent.

  • Report this Comment On May 17, 2009, at 1:47 PM, soflofool wrote:

    "Why is E*trade a $2 stock?"

    I'm no expert but I wouldn't buy it because they have been hemorrhaging money and haven't had a positive P/E since FY2006. I have used etrade in the past, but have now settled into two other brokerages that better meet my needs. Sharebuilder (ING) for my dividend stocks since they have free dividend reinvestment and SogoTrade (Genesis Securities) for my short term trades since the fee is a flat $3 compared to $10 at Sharebuilder.

  • Report this Comment On May 18, 2009, at 12:09 PM, DanielRow wrote:

    wberg pretty much nailed it!

    Have the TARP people replied to ETFC request for funding?

  • Report this Comment On May 18, 2009, at 1:20 PM, mikecart1 wrote:

    TradeKing eats E-Trade for breakfast, lunch, and dinner.

    Why is E-Trade under $2/share? I don't know, just a silly wild guess... their fees are not the lowest in online trading. It doesn't take a genius to figure that out.

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