Is E*TRADE Destined for Greatness?

Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does E*TRADE Financial (ETFC) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.

What we're looking for
The graphs you're about to see tell E*TRADE's story, and we'll be grading the quality of that story in several ways:

• Growth: Are profits, margins, and free cash flow all increasing?
• Valuation: Is share price growing in line with earnings per share?
• Opportunities: Is return on equity increasing while debt to equity declines?
• Dividends: Are dividends consistently growing in a sustainable way?

What the numbers tell you
Now, let's take a look at E*TRADE's key statistics:

ETFC Total Return Price data by YCharts.

Source: YCharts. *Period begins at end of Q4 2009.

ETFC Return on Equity data by YCharts.

Source: YCharts. *Period begins at end of Q4 2009.

How we got here and where we're going
E*TRADE hasn't been doing particularly well on most of its fundamentals -- despite improving EPS, the company continues to post losses -- but its momentum on equity metrics is enough to convert a middling two passing grades into a solid four out of nine passing grades. But what will it take to get the popular online portfolio platform moving in the right direction again on a revenue and free cash flow basis?

E*TRADE has been in positive territory before. The company's 2012 was terrible, with profits becoming losses, unfavorable debt restructurings that resulted in big writedowns, and most worryingly, a diminished trading volume among retail investors. Competing brokerages Charles Schwab (SCHW 0.13%) and TD Ameritrade (AMTD) are diversified in ways E*TRADE isn't -- Schwab has a solid asset management division, and Ameritrade has been growing its investment products revenue at a brisk pace for some time. However, that hasn't insulated them from the trading decline, as Ameritrade's profit slipped in its most recent fiscal quarter. A lower profit beats no profit, though, and E*TRADE's floundering has put up a roadblock in the way of Ameritrade's rumored acquisition.

E*TRADE is also losing the faith of some major shareholders. One of Citadel's hedge fund affiliates recently dumped over 27 million shares in a secondary offering, which served to suppress shares that had been rising strongly into 2013 despite the bad earnings news. E*TRADE is also a bit behind the curve in the ETF game. It provides over 80 commission-free ETFs for investors, but the Deutsche Bank (DB -0.84%)-managed offerings don't have quite the same sparkle of Ameritrade's Vanguard and iShares ETFs, which are typically seen as the gold standard. On the other hand, it's hard for investors seeking out a variety of options and resources to fault E*TRADE's offerings. Full disclosure: My portfolio is managed on E*TRADE's platform, and I have no complaints so far.

Diversification will be key to E*TRADE's revival. Can it navigate the choppy waters of the post-recession financial industry without hitting a dangerous reef, as occurred when E*TRADE attempted to provide loans at a time when the loan market was beyond frothy? That remains to be seen. The company may still be bought out by a larger financial concern, but that looks less likely than it once did.

Putting the pieces together
Today, E*TRADE has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.