I'm a believer in growth stocks. As an analyst for our Motley Fool Rule Breakers service, I think you should be a believer, too. But even I have to admit some growth stories are bogus, hence this regular series. We'll be taking a closer look at many of the market's great growth stocks to see which of them show real, numerically relevant signs of sustainability.

Next up is E*TRADE (Nasdaq: ETFC), a troubled financier that made its mark as a dot-com brokerage and whose baby still provides some of the best laughs on the market. (Type in "etrade baby" and "girlfriend" on YouTube sometime, and you'll see what I mean.)

Investors still don't love what they see in E*TRADE. The stock is down more than 20% over the past year, well below the 6% rally the S&P 500 has enjoyed. Can the broker regain its growth form? Let's get right to the numbers.

Foolish facts

Metric

E*TRADE

CAPS stars (out of 5)

****

Total ratings

2,914

Percent bulls

94.4%

Percent bears

5.6%

Bullish pitches

657 out of 688

Highest rated peers

Morgan Stanley (NYSE: MS), Charles Schwab (Nasdaq: SCHW), Goldman Sachs (NYSE: GS)

Data current as of Sept. 18.

For the most part, Fools believe E*TRADE doesn't need outstanding numbers to rally. "If the company turns a profit anytime soon, its price will soar. Even if the company never turns a profit, it is an attractive buyout candidate. For this company, survival equals success. Anything other than bankruptcy ought to lead to a nice gain," wrote All-Star investor mrindependent.

I'm inclined to agree. E*TRADE's revenue over the past 12 months roughly equals its market value, signaling the very sort of low expectations of which mrindependent writes. Meanwhile, Wall Street expects the company to improve earnings by 23% annually over the next several years.

The elements of growth

Metric

Last 12 Months

2009

2008

Normalized net income growth

Not material

Not material

Not material

Revenue growth

347.7%

55%

(35.3%)

Gross margin

93.3%

91.1%

85.1%

Common equity

38.8%

44.7%

(8.4%)

Shares outstanding

220.2 million

189.4 million

56.4 million

Source: Capital IQ, a division of Standard & Poor's.

These aren't great numbers, but they are improving. Let's review:

  • Profits only recently appeared -- in the latest quarter -- but revenue has been on the rise. Actually, "on the rise" doesn't quite describe it. E*TRADE is rapidly remaking itself.
  • Common equity is also on the rise, a good sign for a banker that depends on balancing a portfolio of assets and investments and producing a return.
  • If there's a troubling part of this tale it comes in the form of rising shares outstanding. Clearly, E*TRADE needed the capital to right itself, but the company massively diluted existing owners when it recapitalized last year.

Competitor and peer checkup

Competitor

Normalized Net Income Growth (3 years)

Charles Schwab

(10.6%)

E*TRADE

7.8%

Goldman Sachs

Not available

Morgan Stanley

Not available

TD AMERITRADE (Nasdaq: AMTD)

(1.6%)

Source: Capital IQ, a division of Standard & Poor's. Data current as of Sept. 18.

For as tough as it's been for E*TRADE, the broker has been better off than most of its peers over the past three years. Rising revenue and a better balance sheet suggest the company may continue to lead.

What could get in the way of a rally is a sharp drop in trading volume. August trading volume was down 36% -- and 4.6% from July. E*TRADE won't get its growth mojo back till investors believe in the market once more.

Grade: Unsustainable
I'm a believer in the benefits of long-term investing in the stock market, but in a crowded market with no discernible competitive advantage aside from a wisecracking baby trader, I don't see E*TRADE as a great growth story.

But I also agree with mrindependent that the stock could make for an interesting value play. E*TRADE is priced as if revenue growth won't continue and net income and book value won't improve.

Now it's your turn to weigh in. Do you like E*TRADE at these levels? Would you make it one of our 11 O'Clock Stocks? Let the debate begin in the comments box below, and when you're done, click here to get today's 11 O'Clock portfolio pick.

You can also ask Tim to evaluate a favorite growth story by sending him an email or replying to him on Twitter.