I've always been a fan of E*TRADE Financial (Nasdaq: ETFC) as far as brokers go. Personally, I'm a customer and have been for many years now. Its services may not be at the bleeding edge -- whether we're talking day-trader bells-and-whistles or low commissions -- but it's been a reliable broker and offers more than enough for this Fool.

As an investment, the company is a very different story. Prior to the financial meltdown, management thought it wise to broaden the business into the mortgage-investing side of banking. That meant loading up the balance sheet with residential mortgages, home equity loans, and mortgage-backed securities, just in time for the real estate market to burst into a catastrophic supernova.

The worst of the crisis is (hopefully) behind us, but E*TRADE's stock is a ghost of its former self, changing hands at a small fraction of what it sold for in 2007. Investment opportunity often finds fertile ground in bleak wreckage, though. Let's try and figure out whether investors should be swarming to E*TRADE's stock.

Buy, buy, buy!

  • There's a good business in there: I'm far from the only investor that seems to appreciate E*TRADE as a broker. In the second quarter, the company added 18,000 net new brokerage accounts, bringing the total to 2.6 million. Brokerage accounts are up from 2.4 million at the beginning of 2008. The company is likewise adding brokerage assets -- net new brokerage assets were $7.2 billion in 2009, and the company's added $4.3 billion so far this year.
  • Underlying profitability: E*TRADE may not be known primarily as a bank, but just like Citigroup (NYSE: C), the company's bottom line has been hammered by losses from loans and mortgage-related investments. And whether we're discussing Citi or E*TRADE, it's a slippery slope to talk about how profitability looks without those investment losses and loan loss provisions ... but I'm going to do it anyway. Over the past 12 months, E*TRADE's operating loss was $269 million, driven primarily by loan loss provisions of $1.1 billion. If provisions were closer to 2006's $45 million level, the company would have produced a positive $760 million in operating profit.
  • Getting active again: Investors have been markedly more skittish following the market's meltdown. That's terrible for E*TRADE's business, since investors who are shaking in their boots don't tend to do much trading. A continued economic recovery could improve investor activity levels.
  • Valuation: E*TRADE's price-to-earnings ratio isn't of much use to us, since it hasn't been producing positive earnings. However, we can look at the fact that the stock currently trades around three-quarters of the company's book value. Prior to the meltdown, the stock hadn't seen a price tag that low since the bottom of the Internet-bubble bust. The stock has spent most of its history trading in the two-times-book range.

Sell, sell, sell!

  • The balance sheet is prettier, but not pretty: At the end of the second quarter, E*TRADE still had $17 billion in loans on its books. That's down from $32 billion in late 2007, but it's still a significant book of loans, particularly considering it's already charged off an amazing $2 billion of the $12 billion in home equity loans that were on the books in late '07. At the end of the first quarter, the company also still held almost $9 billion in mortgage-backed securities.
  • Those terrified traders: Remember what I said above about investors starting to trade more? Well, there's no guarantee that we actually get much of an economic recovery, and even if we do, the crisis may have left an indelible mark on many investors, causing them to avoid stocks for some time.
  • Squeezing commissions: Brokerage customers like to see commissions go in only one direction -- down. That puts E*TRADE's business under constant pressure as it seeks to spar with commission-slashing competitors. Even if it wants to just hold commissions steady, it's likely it will have to continue introducing new service extras -- which mean new costs -- to show account holders they're getting value for those higher-than-the-next-guy's commissions.

Hold it right there, cowboy!

  • Competitive crunch: The online brokerage industry is packed, and E*TRADE faces competition from other large, publicly traded companies such as TD AMERITRADE (Nasdaq: AMTD), Charles Schwab (NYSE: SCHW), Bank of America (NYSE: BAC), and ShareBuilder (a unit of ING (NYSE: ING)). There are also a gaggle of smaller up-and-comers like optionsXpress (Nasdaq: OXPS), Scottrade, Zecco, and TradeKing. However, despite the crush of competition, E*TRADE holds its own. In SmartMoney's 2010 broker survey, E*TRADE took second to Fidelity, receiving particularly high marks in areas such as trading tools and customer service. Investors should only start fretting on the competitive front if E*TRADE appears to start slipping badly.
  • CEO question mark: Former Citigroup executive Steven Freiberg took over the reins at E*TRADE in March. A change at the top is always a good reason to keep an extra-close eye on what the company is doing.

The final verdict
Directionally, E*TRADE is definitely improving. The underlying brokerage business is a good one. The valuation seems to give room for both opportunity and cushion against further bumps in the road. Add that all up, and I find myself squarely in the "buy" camp on E*TRADE.

Have your own thoughts on the buy-ability of E*TRADE's stock? Head down to the comments section and share your thoughts.

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Fool contributor Matt Koppenheffer owns shares of optionsXpress, but does not own shares of any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool's disclosure policy assures you no Wookies were harmed in the making of this article.