Too many investors get excited and jump into a stock without comparing and contrasting against other possibilities. This is true for great stocks, and it's true for terrible stocks. What I'm about to do is play devil's advocate.
In this series, I try to help investors see the possibilities by highlighting a few companies as reference points before making the jump into a stock.
Today's stock is E*TRADE (Nasdaq: ETFC ) . I'll stay away from the more obvious ones like TDAmeritrade and Charles Schwab since you've probably already considered them.
Without further ado...
Annaly Capital (NYSE: NLY )
E*TRADE's Achilles' heel has been the bad bets it's made on real estate securities. While E*TRADE was bleeding with losses in 2007, 2008, and 2009, Annaly made a profit in each year. Since Annaly focuses on mortgage-backed securities that are agency-backed (think Fannie Mae and Freddie Mac), the default risk is mitigated.
Compare that performance and its resulting 15.7% dividend yield to fellow REITs like iStar Financial (NYSE: SFI ) and MPG Office Trust (NYSE: MPG ) . Neither of the latter two currently pay a dividend. Since REITs are obligated to pay out 90% of their taxable income, that means they're losing money. And lots of it. Both of them had losses last year that exceeded their market capitalizations!
BB&T (NYSE: BBT )
Similarly impressive is BB&T's performance. It didn't have a single quarter of losses throughout the credit crisis. That's utterly amazing for a bank of its size. Its price-to-book ratio is quite cheap at 1.05, though its price-to-tangible-book ratio is a little less so at 1.74.
Another paragon of conservative lending, Wells Fargo (NYSE: WFC ) , only had losses in one quarter (that tumultuous fourth quarter of 2008). It trades at similar multiples to BB&T.
American Capital (Nasdaq: ACAS )
Like E*TRADE, American Capital didn't fare nearly as well as these other companies in the financial crisis fallout. As a business development company, this is understandable. It recently averted bankruptcy by restructuring its debt and is trading under its net asset value (NAV).
My colleague Matt Koppenheffer ended with lukewarm feelings about American Capital when he tried to determine whether it is a buy, sell, or hold.
The final reminder
As you decide between E*TRADE and these other alternatives (or none of the above), remember that I mention each of these companies not as recommendations and not as a criticism of E*TRADE. Rather, it's always a good idea to analyze many semi-related companies before making a buy decision. Good luck!
If you got excited while reading about Annaly Capital, here are three dividend stocks to consider first.