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Bash My Stock: E*TRADE Financial

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Welcome to the first edition of a new series I like to call "Bash My Stock."

The concept is simple: take a well-liked company on CAPS and completely debunk the notion that it's worth buying. Does this mean after I put a company through the wringer that it's worth selling? Maybe, maybe not -- that's up to you to decide. The point of "Bash My Stock" is to expose the fact that there's another side to every trade, so this series will attempt to look at the bearish view of why a stock might not be such a great value after all. This series' inaugural victim: E*TRADE Financial (Nasdaq: ETFC  ) .

Out of the 2,759 Motley Fool CAPS participants who have given their opinion on E*TRADE, only 163 have given the company an underperform rating. Optimists can point to a return to profitability, a reduction in loan loss reserves, and perhaps a rumor that Goldman Sachs' (NYSE: GS  ) review of the company may lead to a buyout offer as reasons to be long the stock. Well, longs, it's time for me to bash your stock.

Even though E*TRADE is profitable on an operational basis, the company has turned a full-year profit in four years over the past decade! Even if you weren't a shareholder during the credit crisis, when E*TRADE diluted individual shareholders into oblivion, you've still been susceptible to a ballooning share count.

Let's talk a little bit about E*TRADE's loan loss reserves. Yes, the company was able to decrease its loan loss reserves and yes, delinquencies are falling. Still, the company's banking division has a surprisingly low 7.9% tier-1 capital ratio even after all of its capital raising (i.e. dilutive) efforts. Although net operating interest income ticked marginally higher during the quarter, the company's tighter lending practices could end up hurting more than helping. Playing it safe is fine, but as the company shrinks its balance sheet to a more manageable level, banking revenue is likely to suffer.

Finally, we have the speculation of whether E*TRADE will be purchased by rival TD AMERITRADE (Nasdaq: AMTD  ) or perhaps another rival that would make sense, like Charles Schwab (Nasdaq: SCHW  ) . The problem with this thesis is that E*TRADE really doesn't bring anything to the table. Charles Schwab is the largest U.S. Internet-based broker and, following its purchases of South Financial and Chrysler Financial, could easily grow without E*TRADE's dead weight. Likewise, TD AMERITRADE reported growth in new brokerage assets while E*TRADE's were decisively negative. The carrot is being dangled; unfortunately, there's just no rabbit to be found.

I'm going to be pegging E*TRADE as a sell based on the reasons I've given, but I'd like to have more opinions. Now it's your turn to make your selection in the poll and share your thoughts behind your buy or sell recommendation. E*TRADE bulls and bears, let's hear from you!

Craving more information on E*TRADE? Add it to your watchlist to keep up on the latest news.

Fool contributor Sean Williams has no material interest in any companies mentioned in this article but has had an E*TRADE brokerage account since 1999. You can follow him on CAPS under the screen name TMFUltraLong. Motley Fool newsletter services have recommended buying shares of Charles Schwab. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (0)

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 September 30, 2011, at 10:24 PM, gregandmelinda wrote:

    TD Ameritrade had system failure today. You mean Ameritrade does not bring anything to the table. On the Ameritrade Yahoo message board, people are saying that they lost money again today with the Ameritrade system failing. I could not buy or sell.

  • Report this Comment On October 01, 2011, at 10:29 AM, drchemy wrote:

    Net brokerage assets are increasing for E-trade on a monthly basis as well as a yearly basis (See link below);

    . If you carefully read E-trades financial statement you will see that their net mortgage income is about 200 million a year more than it obtains for other investments. However their write downs on their mortgages are more than twice as much or 400 million, making their mortgage portfolio about a net 200 million loss.

    In addition E-trade has a 12.5% note for a billion dollars with Citadel that based on their bond rating they should be able to refinance at 8.5%. This represents a 40 million dollar savings a year

    Take away taxes on these savings and you have a company that will make another $0.60/share a year on top of $0.60 a year it is now making or $1.20. At a P/E of 14 (current P/E of Ameritrade) the stock should be priced at $17 in a few years*TR...

  • Report this Comment On October 02, 2011, at 1:35 PM, twolf2919 wrote:

    I have brokerage accounts with Ameritrade, Schwab, and E-Trade. E-Trade has, by far, the most usable web site of the bunch. Furthermore, E-Trade's web site seamlessly integrates Bank, Brokerage, and retirement accounts. Transferring money from one to the other is never more than a couple clicks. Paying bills online is never more than a couple clicks away....anyway, if E-Trade got bought up by one of the other two, they' be wise to consider adopting E-Trade's web interface.

    E-Trade has a couple million happy customers.

    So to say E-Trade has nothing desirable for a potential suitor is a bit naive or disingenuous.

  • Report this Comment On October 02, 2011, at 8:53 PM, Jefecaminador wrote:

    AMTD would be stupid to buy ETFC because they wouldn't be getting any quality customers. They'd all leave just like all the quality TOS customers are now.

  • Report this Comment On October 08, 2011, at 4:00 AM, TMFUltraLong wrote:


    I've been an E*TRADE user for 12 years. I like their interface and have never had any issue with their product. But as an investment, the company stinks. Liking the product and buying into the business are two different entities that I can separate for the reasons given above.


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