As a major discount broker, E*TRADE Financial (NASDAQ:ETFC) helps investors seek their fortune in the stock market. But for shareholders in E*TRADE stock to benefit, what they need is for investors to feel confident enough about the stock market's prospects that they open new brokerage accounts and make more stock trades. With its stock up of over 50% just since November, E*TRADE is clearly counting on investor optimism to drive its financial results higher. Let's take a look at what's behind E*TRADE's big move.
The carnage of the market meltdown
E*TRADE's past has been pretty ugly over the past several years, as the brokerage industry has suffered from the shell-shocked reaction that investors had following the financial crisis. Even as stock markets advanced, many investors remained on the sidelines, and that caused problems for players throughout the industry. As you can see below, peers Schwab (NYSE:SCHW) and TD AMERITRADE (NASDAQ:AMTD) have both joined E*TRADE in lagging behind the performance of the broader market since mid-2009.
In addition to tepid levels of activity among investors, brokers also face the difficulty that low interest rates present. During ordinary times, brokers are able to make money from the cash balances their customers keep on hand. But with rates so low, Schwab, Vanguard, Fidelity, and other brokers have had to subsidize their money market funds, and while E*TRADE has largely turned to its banking subsidiary as a cash option for its customers, rates nevertheless affect its ability to profit as well.
What's especially hurting E*TRADE
However, E*TRADE's stock price reflects even worse performance than that of its peers. In its most recent quarter, E*TRADE's revenue fell short of expectations, with a 5% drop in daily average revenue trades. The number of new brokerage accounts it opened fell by more than a third from the year-ago quarter. Monthly activity in April was equally weak, with daily average revenue trades falling 3% from the year-ago month. That's alarming news given the huge run-up the stock market has had, which ordinarily would have stoked greater enthusiasm already among potential and current customers.
That performance has led a vicious circle for the stock, as key investors have lost confidence in the company's ability to recover further. For instance, in March, Citadel Equity Fund sold off its nearly 10% stake in E*TRADE through a secondary offering, taking advantage of the recent jump in the stock to sell out.
In addition, E*TRADE has largely missed out on some of the favorable trends in the industry. TD AMERITRADE and Schwab have launched extensive commission-free ETF platforms to draw in new customers, joining rivals Fidelity and Vanguard. E*TRADE has a commission-free ETF platform, but its lineup of WisdomTree, GlobalX, and db-X funds doesn't carry nearly the popularity of the iShares, SPDR, and Vanguard funds that most of E*TRADE's peers focus on in their platforms.
E*TRADE stock has already reflected the expectation that all of these negatives will reverse themselves in the near future. Until it proves its ability to follow through on those positive views, E*TRADE doesn't look like a good bet from a risk-reward standpoint at this point.
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Fool contributor Dan Caplinger has no position in any stocks mentioned. You can follow him on Twitter @DanCaplinger. The Motley Fool recommends TD Ameritrade. 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.