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Shares of E*TRADE (Nasdaq: ETFC  ) fell on Thursday and Friday, shedding 8% of their value during the past two trading days.

The culprit was a secondary stock sale, in which Citadel Investment Group unloaded 172 million shares of the online discount broker. Forensic media reports, however, are dusting for the wrong fingerprints.

The common theory behind E*TRADE's sell-off is that as its largest stakeholder, Citadel may now begin unloading more of its stake. The sale wasn't dilutive -- since no new shares were issued -- but it does increase the public float. In other words, it may take a little more force on either side to move the stock in the future.

It's a fair thesis, but I think the bigger issue here is E*TRADE's diminishing viability as a buyout candidate. If Citadel felt that a buyout was coming soon at a decent premium, it wouldn't have sold off a chunk of its shares.

It's hard to buy E*TRADE as a buyout speculation now, even if it makes perfect sense for larger rivals TD AMERITRADE (Nasdaq: AMTD  ) and Charles Scwhab (Nasdaq: SCHW  ) to offset organic sluggishness with a timely purchase. In fact, TD AMERITRADE's CEO even hinted at sector consolidation during last month's conference call.

This doesn't mean that E*TRADE needs to be bought out. It was the only one of the three largest discounters to top Wall Street's first-quarter estimates last month. Its days of red ink appear to be ending. Analysts see E*TRADE breaking even during the second half of this year, before bouncing back with a profit of $0.07 a share come 2011.

Accounts, client assets, and margin receivables all inched sequentially higher during this year's freshman quarter.

E*TRADE also has a new CEO in former Citigroup (NYSE: C  ) exec Steven Freiberg, who appears committed to turning the broker around for the long haul, instead of the short-term bonus glory of overseeing a corporate handoff.

Its recent move to gain shareholder approval for a reverse split -- following in the footsteps of AIG (NYSE: AIG  ) , Coeur d'Alene Mines (NYSE: CDE  ) , and Biglari Holdings (NYSE: BH  ) , which have all moved higher since executing reverse splits last year -- is another sign that E*TRADE wants to give it a shot as an independent.

Citadel's partial sale is shaking out the speculators, but hopefully it creates a dinner bell for investors.

Charles Schwab is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletters today, free for 30 days.

Longtime Fool contributor Rick Munarriz has been trading exclusively through discount brokers since 1990, but 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.

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  • Report this Comment On May 04, 2010, at 7:41 AM, sray877897 wrote:

    You make some points, albeit flimsy ones. Has anyone heard a word from the new CEO? Where is he? No mention of the bad loans on the books? ET has benefitted from the rising equities markets but also the Real Estate market clawing its way back. What would happen if RE stubs its toe and the all-important Spring RE market disappoints? Defaults rise? Any thoughts? What of the impact of the current price war that ET finds itself in and its impact on revenue next Q and beyond? What if stronger competitors like Schwab, TD, Fidelity turn the heat up a notch (because they can). What contingency would ET have to assure revs? What would happen not if but when this roaring market pulls back? Traditionally, in a down market ET clients tighten up, freeze and trading slows down. Another drag on earnings that we can anticipate. 7 cents profit is extremely rosy, and potential suitors see all these mines in the field, just saying.

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