Welcome to the first edition of a new series I like to call "Bash My Stock."
The concept is simple: take a well-liked company on CAPS and completely debunk the notion that it's worth buying. Does this mean after I put a company through the wringer that it's worth selling? Maybe, maybe not -- that's up to you to decide. The point of "Bash My Stock" is to expose the fact that there's another side to every trade, so this series will attempt to look at the bearish view of why a stock might not be such a great value after all. This series' inaugural victim: E*TRADE Financial
Out of the 2,759 Motley Fool CAPS participants who have given their opinion on E*TRADE, only 163 have given the company an underperform rating. Optimists can point to a return to profitability, a reduction in loan loss reserves, and perhaps a rumor that Goldman Sachs'
Even though E*TRADE is profitable on an operational basis, the company has turned a full-year profit in four years over the past decade! Even if you weren't a shareholder during the credit crisis, when E*TRADE diluted individual shareholders into oblivion, you've still been susceptible to a ballooning share count.
Let's talk a little bit about E*TRADE's loan loss reserves. Yes, the company was able to decrease its loan loss reserves and yes, delinquencies are falling. Still, the company's banking division has a surprisingly low 7.9% tier-1 capital ratio even after all of its capital raising (i.e. dilutive) efforts. Although net operating interest income ticked marginally higher during the quarter, the company's tighter lending practices could end up hurting more than helping. Playing it safe is fine, but as the company shrinks its balance sheet to a more manageable level, banking revenue is likely to suffer.
Finally, we have the speculation of whether E*TRADE will be purchased by rival TD AMERITRADE
I'm going to be pegging E*TRADE as a sell based on the reasons I've given, but I'd like to have more opinions. Now it's your turn to make your selection in the poll and share your thoughts behind your buy or sell recommendation. E*TRADE bulls and bears, let's hear from you!
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Fool contributor Sean Williams has no material interest in any companies mentioned in this article but has had an E*TRADE brokerage account since 1999. You can follow him on CAPS under the screen name TMFUltraLong. Motley Fool newsletter services have recommended buying shares of Charles Schwab. Try any of our Foolish newsletter services free for 30 days. We Fools don't 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.