Stocks rose throughout 2019, but investor satisfaction fell. That's what a recent survey from E*Trade Financial (NASDAQ:ETFC) found. It seems 48% of self-directed investors are dissatisfied with their investment decisions last year, and 60% plan to make portfolio changes in 2020.
Trading has never been easier. Zero-fee brokers, up-to-the-second stock charts, and a constant bombardment of news all contribute to investors moving in and out of positions. It's better to buy and hold for the long term, but dissatisfaction leads many to think short-term. And if investors can be dissatisfied in a bull market like this, what will they feel in the next inevitable bear market?
All that being said, trading could rise and the market could become more volatile in the coming year. And "volatile" is a scary word for investors. What a smart investor needs is a stock that profits from a bull market or a bear market, as long as it means increased trading. Both E*Trade and Nasdaq Stock Market (NASDAQ:NDAQ) are companies that do just that. Here's how.
E*Trade cashes in when investors cash out
Joining the ranks of upstart online brokerage Robinhood and select other brokerages, E*Trade now offers commission-free stock trading, and it can be a great brokerage for investors looking for a mobile platform. It's also been a solid long-term investment. Although shares are down 30% from 2018 highs, its share price has doubled over the past five years.
E*Trade makes 65% of its revenue -- $1.9 billion in the trailing 12 months -- in interest from customer cash. To increase this revenue, the company has to attract more customer deposits. But it also benefits when current customers sell investments and move to a cash position. In fact, investors may already be getting jittery, as management noted that its customers were net sellers of securities in the third quarter. Customers may choose to cash out further if the market turns bearish this year. In that environment, E*Trade will profit from increased interest income on the cash it holds for investors.
However, if investors don't cash out of securities in 2020, E*Trade still has a powerful growth driver. It's the top player in corporate stock plans, administering plans for 20% of S&P 500 companies. Employees paid in stock options exercise them on E*Trade's platform, and from there choose what to do with the money. Currently, 15% of the cash stays with E*Trade, as the company is right there offering brokerage services. This business segment will be a growth driver no matter what the market does in the months ahead.
Nasdaq's profitable information services
Nasdaq is more than just a stock exchange. This company is a diverse business with five segments. Its biggest segment is market services -- accounting for 36% of Nasdaq's total revenue in the third quarter of 2019. It collects this revenue by charging fees to brokers for trading derivatives, ETFs, currencies, and more through Nasdaq's offerings. While this is Nasdaq's largest business segment, growth has slowed to just 2% in the third quarter.
However, as stock trading picks up, so does the need for good data. And that's how Nasdaq's information services segment makes money. Nasdaq provides both data and analytics to mostly institutional investors. This segment is growing fast -- up 11% year over year in Q3. But of note to investors is that this is Nasdaq's most profitable business segment, with a 64% operating income margin.
Supposing increased trading and market volatility aren't issues in 2020, Nasdaq can continue profiting from the market's bull run instead. As the stock market remains strong, more companies come public through IPOs. And Nasdaq is currently crushing the IPO listing game. In the first three quarters of 2019, 181 companies came public through IPOs. Of those, 138 (76%) have chosen Nasdaq as their exchange. Nasdaq not only records revenue at the time of IPO, but these companies continue to pay annually to be listed there.
If you only want one
There is upside with both of these companies, but E*Trade is the more contrarian stock pick. Many analysts are worried about E*Trade losing market share as competitors get acquired by bigger players with deeper pockets -- like when Charles Schwab acquired TD Ameritrade in November 2019. For its part, in the Q3 earnings call, E*Trade's management mentioned former customers returning to the platform now that it offers commission-free trading, but no concrete numbers were provided. Investors should watch E*Trade's upcoming fourth quarter for better insight into how strong the business really is in these competitive times.
Nasdaq, on the other hand, seems to be a more predictable business. No matter which way the market goes from here, Nasdaq has a business offering to profit. It's been a great long-term winner, more than doubling over the past five years, and a four-bagger over the past 10 years. Even with this growth, shares are reasonably priced at 20 times forward earnings, making this a company any investor should have on their watchlist.