It's easy for individual investors to gravitate toward the discount brokers. If you're taking control of your finances and arriving at your own buy-and-sell entry points, online discounters look pretty good.

Unfortunately for those same investors, the discount brokers aren't all built the same.

Every week, I take a stock to task in this column. I'm no meanie. I do come right back with three related recommendations that I think will be better in your portfolio. With two of the biggest discounters reporting yesterday, I know just where I'm going this time.

Who gets tossed out this week? Come on down, E*TRADE (NASDAQ:ETFC).

A fine line between broke and broker
I have been a big fan of E*TRADE over the years, but I have to call it out this week.

E*TRADE and rival TD AMERITRADE (NASDAQ:AMTD) posted their quarterly reports just hours apart yesterday, and the disparities are obvious.

  • E*TRADE posted its ninth consecutive quarterly loss. The $0.05-per-share deficit before non-cash charges is refreshingly more narrow than previous shortcomings, but it still pales when compared with the $0.26-per-share profit that its consistently profitable rival delivered.
  • As a result of stock sales and debt-for-equity swaps, E*TRADE's balance sheet has improved, but its outstanding shares have more than doubled over the past year. TD AMERITRADE has a lower share count than it had a year ago, after repurchasing $450 million worth of stock in fiscal 2009.
  • Both companies are growing their brokerage account base, but TD AMERITRADE has been shrewd enough to pad record organic growth with timely acquisitions.
  • E*TRADE has made some serious strides in cleaning up its mortgage-lending headaches, though special-mention delinquencies in its home-equity portfolio surprisingly inched higher. TD AMERITRADE and Charles Schwab (NASDAQ:SCHW) stayed prudently away from the subprime meltdown's collateral damage.
  • TD AMERITRADE is projecting a profit of $1.10 to $1.40 a share in its new fiscal year. E*TRADE isn't telling investors when it will return to profitability.

One can argue that E*TRADE's lottery-ticket price discounts its shortcomings, but shareholders deserve better. Despite last year's E*TRADE Baby rollout -- the industry's best marketing campaign, really -- and rallying markets this year, its quarterly financials are still in the red. It also posted an 11% sequential decline in daily average revenue trades this past quarter.

There's always the chance that Schwab or TD AMERITRADE will pounce on E*TRADE as a buyout target, but its self-inflicted dilution is going to ultimately drive down a potential acquisition price.

Good news
As I do every week, I don't talk down a stock unless I have three alternatives that I believe will outperform the company getting tossed. Let's go over three new fill-ins.

  • Morningstar (NASDAQ:MORN): The mutual fund and equity research specialist reports its third-quarter results tomorrow. The first half of 2009 wasn't very encouraging. Revenue declined by 8% to $236.3 million, with earnings slipping a little bit more. It's still holding up better than smaller research facilitators (NASDAQ:TSCM) and Value Line (NASDAQ:VALU), and the year-over-year comparisons should get easier.
  • China Finance Online (NASDAQ:JRJC): If betting on the evolution of independent research is a healthy theme, why not double down with an overseas play? China Finance Online runs the popular and financial portals in China. It has struggled this year, but it still watches over 12.4 million registered users, with more than 100,000 of those paying as premium subscribers. Renewed faith in China's equity markets will help, as analysts see a quick return to profitability next year on 32% revenue growth.
  • TD AMERITRADE: Since the bulk of my bearish thesis was built on sizing E*TRADE against TD AMERITRADE, I may as well pat the victor on the back. Schwab and TD AMERITRADE are making the most of their opportunities, but TD AMERITRADE trades at a lower earnings multiple and appears to be the more opportunistic consolidator. Whether it adopts the E*TRADE Baby or not, you have to like its chances as long as the market doesn't head south.

Sorry, E*TRADE Baby. Let's hope things get better during your terrible twos.  

China Finance Online is a Motley Fool Rule Breakers recommendation. Morningstar, Charles Schwab, and Value Line are Motley Fool Stock Advisor recommendations. The Fool owns shares of Morningstar. Try any of our Foolish newsletter services free for 30 days.

Longtime Fool contributor Rick Munarriz always takes out the garbage. He owns no shares in any of the stocks in this column. Rick is also part of the Rule Breakers newsletter research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.