Is E TRADE Financial Corporation Destined for Greatness?

Let's see what the numbers say about E*TRADE (ETFC).

Jul 7, 2014 at 11:59AM

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 (NASDAQ: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 Chart

Passing Criteria

3-Year* Change 


Revenue growth > 30%



Improving profit margin



Free cash flow growth > Net income growth

(62%) vs. 128.9%


Improving EPS



Stock growth (+ 15%) < EPS growth

47.3% vs. 147.7%


Source: YCharts. * Period begins at end of Q1 2011.

ETFC Return on Equity (TTM) Chart

Passing Criteria

3-Year* Change


Improving return on equity



Declining debt to equity



Source: YCharts. * Period begins at end of Q1 2011.

How we got here and where we're going
E*Trade has picked up another passing grade since its last assessment to finish with a strong five-of-seven score. While the online broker continues to grapple with declining revenue, investors have finally caught on to the improvement on E*Trade's bottom line, and have sent shares soaring nearly 150% since the start of 2013. E*Trade's free cash flow also looks solid on a nominal basis despite continuing to decline from earlier levels, as its trailing 12-month result on this metric is over three times what it recorded in net income. Can E*Trade reverse the decline on its top line and in its free cash flow to pick up a rare perfect score when we examine it next year? Let's dig deeper to find out.

E*Trade flew through 2013 as it returned to profitability on the back of improving loan quality and growth in its core brokerage business. However, 2014 has not been quite as kind, despite the fact that E*Trade continued its momentum in the first quarter. A great deal of pain has been blamed on the new Michael Lewis high-frequency trading expose Flash Boys, which frightened investors by highlighting a less-known element of the company's business. That fear has subsided somewhat since, but it's arguable that the sell-off was senseless to start with, as E*Trade actually divested its market-making business last year, greatly reducing its direct exposure to high-frequency trading.

Since emerging from the financial crisis, E*Trade has struggled to overcome the weight of billions of dollars in bad mortgages, which could actually become more dangerous next year, according to Fool financial specialist John Maxfield. Roughly 80% of E*Trade's home equity loans -- most of which were originated with minimal documentation at the height of the housing bubble -- won't begin amortizing until 2015. While E*Trade's growth looks attractive now, a second wave of defaults next year would certainly turn all that progress around in a hurry.

E*Trade's core brokerage business has also come under increasingly intense competition. Bank of America's Merrill Lynch segment is undercutting many brokerages with a rock-bottom commission fee that's 30% lower than E*Trade's standard $9.99 commission. But E*Trade has made savvy moves in both of these areas, divesting $800 million in loans during the first quarter and growing daily trading volumes and margin balances to the highest levels since the financial crisis. If it can continue to reduce the weight of bad loans while simultaneously fending off aggressive brokerage competitors, there's no reason not to expect further growth in E*Trade's shares over the coming year.

Putting the pieces together
Today, E*TRADE has many 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.

Take advantage of this little-known tax "loophole"
Recent tax increases have affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Alex Planes has no position in any stocks mentioned. The Motley Fool recommends Bank of America. The Motley Fool owns shares of Bank of America. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers