E*Trade Financial Corp (ETFC)

ETFC has landed in the top 10 highest cash flow yielding equities. As I mentioned in my first blog, one needs to be careful when screening for value stocks. The sole reason many equities are "values", is because they have been hammered my the market. This is etrade in a nutshell.

The Etrade story - what happened?
Very simple really, etrade fell into the same yield chasing trap many cash investors did between 2004-2007. Read my post on my economic forecast for more info. To Juice EPS a bit, Etrade purchased CDO's, and HELOC's. So instead of being a broker, Etrade was becoming a MREIT(mortgage real estate investment trust). A citigroup anal - yst, then suggested that Etrade would go bankrupt due to this strategic mistake. The stock price went from 25 to 2.

Now etrade has sold most all of its toxic waste at a huge non-cash loss. Etrade is keeping its 12-15B home equity portfolio. At the latest investor presentation, Etrade showed convincingly that its HELOC was stronger the Wells Fargo HELOC portfolio. The good thing about the HELOC, is it runs off quickly. Within 5 years it will be gone, and during that time Etrade will make more in interest income, than it has to write off imho.

Now let look at the brokerage business. At the time of creating my cash flow spreadsheet, Etrade brokerage side was making over 1B per annum in cash flow from op's, and free cash flow was close to this number also. Over a 70% cash flow yield at the time! Etrade international expansion is going very well also. My model has a current valuation of 22 per share for Etrade's brokerage side. I give the banking side of Etrade a value of 0. If you think Wells Fargo has a positive value, you would have to also give Etrade banking side a positive value imho.

Even with a 50% margin of safety, Etrade is worth more than 10 a share. I do believe in buying stocks when everyone hate them - I have had my largest gains in this way. I purchased a huge stack of call options($3, $4, $5,) when Etrade was trading below 2.5 a share. I will only sell when Etrade goes back above 10.....

Etrade is tecnically insolvent by looking at financials. Due to the amount of short term debt due this year, and the low levels of liquidity at this firm I don't know how they stay in business short of assets sales if there is anyone even interested in buying them. This is what I call a value trap. The thing to watch out for are for the remaining customers to flee with their money to the competitors. Buy this at your own risk.

Not that these bankers actually know any more than the rest of us, but the ETFC CEO, who was Vice Chair of JP Morgan, requested that all of his 2008 and 2009 incentive compensation for ETFC be in the form of equity. Whether he is right or wrong in this case is yet to be seen, but you can be certain he has better insight into the company than any Fool here, has 30 years in banking, and has proven he knows how to make himself rich.

On one hand, equity-based compensation can be lauded as selfless and benevolent behavior toward a cash-strapped company down on its sub-prime luck. But on the other hand, I see it as someone acting exactly in line with market incentives. If he interpreted the risks correctly, I reckon he stands to make many tens of millions (and have a hero's legacy) if he does his job right, and that's far more than any salary they could give him. Steve Jobs showed up at a company a few years back and did something similar, I believe.

Think of what it would take for you to show up at a 20-yr-old beleaguered company and, after looking through their books and talking to all your expert colleagues and advisors, decide to bookend your long and notable career by working around the clock for two straight years for no salary when you are already wealthy.

I'm going through my picks and updating them (since I didn't both to even write a pitch on some of them). So, here it is (basing it off of a post on the SA boards):

Etrade - I love it, and have found customer service to be great. I think Etrade has a great trading platform.

Now the question is whether Etrade is a good investment. At these prices, you can't argue that there wouldn't be a tremendous upside if Etrade recovers. So far, they've managed to pull it all together. Etrade was an early warning sign of all this mess, and have been busy selling off assets and attempting to right themselves (take a look at their financial statements and news since the end of 07 forward). My opinion - first in, first out...but it will be a risk.

As everyone already knows, all of Etrade's problems come from the banking side.

I had recently read an article on the Fool regarding Etrade as a buyout opportunity. I believe that is true. Etrade makes a great asset play. Their customer accounts continue to show a strong increase, and their brand name is strong. Now, that being said, I'm sure that many stockholders would not be pleased with a low $5 buyout (although it would make new holders VERY pleased).

What would make more sense to me (and this is just rampant speculation here) is for Etrade to spin off the banking portion of the company and sell that off (which will come with any TARP money that it receives), resolve their outstanding debts, and get back to their core competency - being an online broker. In fact, I already have someone in mind - GS. They have already announced their intent to get into online banking, and Etrade already has the platform.

Alright...all of that being said, here is what I'd say - If you invest in Etrade, you're investing in a financial company that has risk associated with it. It is a borderline speculative trade. If you believe that they'll be able to resolve their problems, then there is nothing but tremendous upside for this stock in the long term - easily a 10 bagger. On the flip side, the worst case scenario is to restructure or go bankrupt (although I believe they would look for a buyout before that happened). In that case, you don't have far to fall...they're currently just above a dollar.

Ok, let’s start with my opposition to the current babies-making-trades ad campaign. I think it’s unrealistic. I am mean if the babies are that advanced they would totally be doing other stuff. I mean really, you’re some super genius 18 month old and the first thing you do with your power is buy a 10 shares of Ford?!?! I think not. Plus where do they get the money? Most of them wouldn’t have any cash until they are like 6 or 7 and get an allowance or work in a shoe factory or something. Please.

Anyway… they get a green thumb from me on that basis that despite some still shaky sub-prime loans on the books that they have a once again growing brokerage business in a mature, efficient, high margin environment. E*Trade also has excellent tools, customer interfaces, and in my experience – customer service. (Your experience may be different, some restrictions apply, void where prohibited, please don’t yell at me)

Mostly they look like a really sweet target for a takeover by one of the other houses.

E-trade was one of the first companies to recognize their banking problems and work to resolve them. They sold off some of their assets and focused on their core business. The obtained private financing before TARP was even thought of. Despite constantly being dogged by the media they launched an agressive ad campaign to bring in more business. They introduced online trading into the Smartphone world with Etrade Mobile. Just based on these effort alone I would like this company to succeed.

However, Etrade still has massive amounts of debt. They still have alot of bad assets on their books. Etrade is teetering on the brink of having inadequate capital to remain a brokerage may get taken over by the OTS. Etrade was completely snubbed by the government's TARP program (wasn't big enough to fail you know). **Note to self: elect Etrade board member to Congress. End note** Therefore Etrade may be forced to dilute current shareholders in order to raise enough capital to stay in business. With the share price hovering at $1.50 per share, thats alot of dilution.

As much as I would like to see Etrade succeed, with the government deciding the winners and losers, its hard for a company like Etrade to compete. I wish Etrade well, but if things dont improve by the end of the year I will have to take my losses and move on.

If E*Trade Financial Corp is going bankrupt then I am making a bad call, but if E*trade is doing the volume of business that everyone else I know of is doing then they will make money. They do have some liquidity issues they might need the government to help with. Less banking and more trading and they would have been better off. More smart apps and less sub 1% internet banking interest. Their advertising and branding will come into play. It's my view and experience that more people are trading on their own now. The fear of missing, volitility, lack of experience, and just the huge fun of trading on your own and micro managing your portfolio lends itself naturally to lots of churn. I use to wonder why the mutual funds my 401K is invested in had so much annual churn, kicking all the value out in capital gains, but know I have a better idea of why they do it! Although the economy was a lot more stable when I use to criticise them for that! E*trade will succeed, in spite of theirselves, else I'll trade it!

ETFC has been quietly performing a solid recovery while accelerating its core business (online brokerage) over its peers. It has been building its cash balance and provisions against its mortgage porfolio while its mortgage portfolio is performing better than most others in the business. They are next month going to retire $450 in Debt for a mere $50 Million in equities and reported last Quarter CC that its losses in HELOCs appears to have peaked as well as its provisioning efforts. Currently, ETFC has almost no 2007 vintage HELOCS and its 2006 HELOCs are performing better again than its peers. They have reduced their open HELOCs from $7 B down to $3 B and none of those are late payment or delinquent. Their brokerage is No. 1 in the online investment industry and all points to a profitable quarter the 1QTR of 2009. Everything is lining up and not even their arch enemy Citigroup (Bhatia Analyst) is able to sink their ship. Short interest has decreased from 127 million shares + or 24% of outstanding shares to 80 million or 15% of outstanding shares. Those clients with Etrade are extremely loyal and many own significant stock in the company. All points to very successful growth in PPS over the next two year and beyond.

I officailly picked E-trade when it was at $2.66 here on TMF. However, just recently I realized a position with E-trade at $1.30 a share. I had to pull the trigger on this stock. E-trade has been beaten down badly and is trading at a huge discount to its peers. Right now I have to ask myself is this company going bankrupt? Well, with their current debt for shares swap it saved the shareholder money.... about $1.30 per share. Yes this will "dilute" us, but it saved alot of money in interest, and wiped out a nice chunk of debt.

What is better then to have the debt holders become "common" share holders, hmmm. Well usually debt holders get paid earlier in a BK and common share holders get paid last (if there is anything left). Looks to me the debt holders see more upside potential by holding common shares!

I could be wrong, but with the current volume increase, this stock is starting to be noticed. With FNM, FRE, AIG.... all posting huge gains, for nothing but pure speculation. ETFC is still waiting for its launch. When this pops I would hate to be a short, (35% short = one HUGE launch pad). As soon as this stock gets steam it will double in a day. Friday, August 28 we got a 13% increase. Will this provide the fire to light this rocket on Monday, or will it just fizzle into the Ocean?

Just my uneducated specualtion here.

Im long at $1.30.

E*Trade Bank made smart moves to position themselves to weather the storm (e.g. paused lending, figured out what was going on, then restarted with a new focus). They were also quick to shore up cash to back up bad loans and kept the ship afloat without wailing for TARP money.

On top of the right moves on the bank side, they are also continuously growing their brokerage business with the increased trading activity. If I were someone looking to open a new brokerage account, the baby commercials definitely come to mind and remind me that they're alive and kicking.

...but I'm not looking to open a new brokerage account. I have a few already, and my past with E*Trade has been a love-hate relationship. That was the past. I had many qualms in the early years of our relationship. They messed up some of my orders, failed to enroll/withdraw me into/from programs (e.g. DRiP), and had me on hold for quite a while every time I had a problem. Since I'm someone who works on relationships, I let them know.

In the past few years, I have noticed a great deal of improvements. Order execution has been flawless and quick, I have not had to stay on hold for more than 30 seconds, and the trading platform is outstanding.

I have since opened 3 more accounts with E*Trade (savings, checking, IRA), and they have climbed from the bottom of my list to the top.

It's Foolish to know what a company's customer base thinks. I know this one first hand. The E*Trade brand is solid, and I only hope they regrow organically without being snatched up by another company that may not offer as much.

This is a bet I'm comfortable with. Admittedly, a penny stock but as the #2 web trading service that made some intelligent moves recently I believed it to be under valued at the time I picked it.

High potential for a multibagger, just don't do something foolish like bet the farm with it this close to a dollar.

There has been a large selloff of this stock due to missing analyst estimates of losses. Analysts projected a loss of 40c per share and actual losses were 41c per share. What makes me believe that this stock will rebound is this. Their cash position has grown significantly over the past few quarters and their LT and ST debt has decreased. Additionally they are showing reduced delinquency in their higher risk home equity loans. This is still a speculative play, but one I feel comfortable with.

Use it, love it, recommend it.

Can this much loved company save itself from the stupid subprime lending mistakes by increasing its very successful electronic brokerage business? I like the incentive compensation and inside ownership. Outperform.

- stock beaten down, 80%

- Managment has avoided bankrupcy

- $1.7 billion loss in q4 to a mere $91 million loss in the following Q

- Management has contained problem

- record customer growth since 2005

- strong performance for the group in Q1

- international exposure: middle east initiative

What a ride its been for E*Trade (ETFC). The once juggernaut online discount brokerage has had an equally massive drop in confidence by investors of late. From around $24 to to $2.25 in the span of a year? Someone tell ETFC they're a little late to the dotcom bust.

No matter, this isn't a Pets.com. There's good management in place and there's still a fair amount of cash flow available. ETFC is going to be around for quite some time.

As CanadianCapitalist.com said:
"So, should you be worried if you are a customer of E*Trade? First, the chances of E*Trade filing for bankruptcy is still pretty low. Second, even in the unlikely event of a bankruptcy, customer assets are likely to be intact (unless there is fraud). Third, the Canadian Investor Protection Fund (CIPF) is likely to make good any shortfall up to $1 million under various conditions. E*Trade also says client accounts have private insurance that will protect from net losses in excess of CIPF limits up to $9 million in the event of a bankruptcy."
(http://www.canadiancapitalist.com/2007/11/12/worried-about-your-etrade-account)

After hitting (almost) rock bottom, the stock's been on a relatively steady climb, growing over 40%!

Anybody catch ETFC's Suberbowl baby ads? They're on a come-back and they're here to stay. There're still a few customers hanging around.

I feel confident ETFC is going to reclaim its former glory and stock price. Get in on this now! There's great long-term potential here. Even for short-term investors, this is very attractive - who can argue with 43%+ gains in a few short weeks?

Again, ETFC isn't going poof; its here to stay and there's nowhere left to go but up.

If ain't going bankrupt it would either going to be in teens or will be bought out over $5 within a year.

E*trade, the fallen star of the sector. I will disclose up front that about 1/3 of my real portfolio is Etrade. Etrade is in a tough spot, but their current CEO is doing all the right things. They were beaten down a bit too much in the Sub-Prime fiasco, and that was their own fault. They have since sold their riskiest loans, padded their mattress for future losses, added more customers than they lost, and are doing a great job in cutting costs. How much costs? Not just private jets but exposure. They trimmed their exposure to home euity lines of credit quite a bit, preemptively I might add,and are going to trim another 1.2 billion by the end of April. This greatly reduces future risk from people taking money against a house that may not be able to hold up that line of credit anymore. In addition, they are also focusing on their bread and butter, their brokerage. Their turn around may not be as quick as some would like, but they will be profitable by years end, and their stock will rise once more. Give it 2 to 3 years, and they will be right back in the mid to high teens.

Etrade has one of the best online services and it is giving great services to investors online, it will outperform in few months, it is good time to buy it stocks now, and be able to make $$$ in 2-3 months end of july. Etrade has done it will do it over. Jamking.