E*Trade Deserves Better

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It's so easy to kick E*Trade (Nasdaq: ETFC  ) when it's down. Standard & Poor's Ratings Services is downgrading the discount broker's debt.

Tumbling several notches deeper into junk status -- from B to CCC-minus -- may sound like a death knell. Hold on to that eulogy, though.

Yes, the picture at E*Trade is ugly at the moment. Regulators want the company to raise new capital, as it continues to pay for its aggressive online banking mistakes. Nor will anyone be wooed by E*Trade's balance sheet. With $8.1 billion in debt and a pesky debt-to-equity ratio of 3.28, it's not going to win any beauty pageants. The company's income statements aren't any prettier, with the broker rattling off seven consecutive quarterly losses.

But when will E*Trade be given credit for its growth as a discount broker? It tacked on 32,550 net brokerage accounts last month alone. It now watches over a record 4.5 million accounts.

It's struggling in attracting new banking accounts, but that's not a surprise. E*Trade's bread-and-butter Complete Savings Account (CSA) vehicle has gone from yielding a healthy 3.01% at the beginning of the year to a puny 0.95% today.

So what? If the growth is gravitating toward its discount brokerage business, that's a good thing. E*Trade's peers, including Charles Schwab (Nasdaq: SCHW  ) , TD AMERITRADE (Nasdaq: AMTD  ) , and even smaller niche players optionsXpress (Nasdaq: OXPS  ) and thinkorswim (Nasdaq: SWIM  ) , are consistently profitable.

How much will E*Trade's brokerage business need to grow so it can offset the capital crunch on the banking side? A lot, I know, but this is also a stock that's trading for 95% less than it was when it peaked three years ago.

Between the popular E*Trade Baby ads and new mobile trading apps for Apple (Nasdaq: AAPL  ) iPhone and Research In Motion (Nasdaq: RIMM  ) BlackBerry owners, the company is more relevant now than it was in 2006.

The hurdles along the way -- billions in debt, burdensome deficits that are projected to continue in the near term, and regulator capital requirements -- won't be easy to clear. This week's S&P credit downgrade only cements the risks that were already hardening. However, at this price -- and with so much potential upside if it ever catches up to its discount-brokerage peers -- it's a compelling speculation.

Go, E*Trade Baby. Be the master hurdler.

In the market for a new discount broker? The way that rates and initial deposits are bouncing around, we can't say we blame you. Check the sponsored-broker comparison table in the Discount Broker Center to see whether 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 newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz believes in self-service gasoline pumps and self-service stock brokerages. He owns no shares in any of the companies in this story and is 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 (5) | Recommend This Article (64)

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 24, 2009, at 5:12 AM, Babachrono wrote:

    Unfortunately for them, Scottrade is the best broker for anyone that is a true investor. Can't beat $7 a trade no matter how many shares. And there are no minimums or activity fees. These other guys all charge more than that, or in the event the fee is less it requires that so many trades be made in a month or a quarter.

  • Report this Comment On May 24, 2009, at 12:06 PM, oghowie wrote:

    Scottrade website usability just isn't as good as Etrade. I've had both and got rid of Scottrade even though I pay $2 more per trade with Etrade.

  • Report this Comment On May 25, 2009, at 10:55 PM, kellogg9 wrote:

    For me as a not-so-avtive trader i was always looking for a discount broker that didnt charge me an arm and a leg to do investing. I originally was an Etrade member until i found i couldnt handle the costs for commission and inactivity fees. I eventually turned to Questrade since they dont charge inactivity fees and their price for trades is $4.95 ... hard to beat. I dont do much trading so Questrade fit well for me. Until Etrade can learn to adapt to such a market as myself (which is big) i think they will continue to tank

    Btw, if anyone is looking for Stock Coupons such as ones from Questrade for Promotional Codes, and Discounts check out:


  • Report this Comment On May 27, 2009, at 7:11 PM, HAUG0099 wrote:

    I have used most of the brokers over the years, Etrade really is one of the better. Their research is the best, which is important. As for Motley Fool, they have one article knocking Etrade and another pumping it within days of each other. The Fool is the absolute worse research company out there

  • Report this Comment On May 28, 2009, at 10:09 PM, danielmharrison wrote:

    "As for Motley Fool, they have one article knocking Etrade and another pumping it within days of each other. The Fool is the absolute worse research company out there."

    Just out of interest, how can two different perspectives constitute bad research?

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