If there is a silver lining in the disaster that has been investing in the markets in 2008, it's that increases in volatility made it possible to generate huge returns moving in and out of stocks in a very short period of time.
Day trading had all but disappeared after the dot-com crash. And while the strategy is making a comeback in a major way this year, investors have yet to catch on.
Think about it for a moment. What businesses were at the forefront of this investment strategy?
Discount online brokers, led by E*Trade Financial Corp. (NASDAQ: ETFC), were some of the biggest winners during the boom in day trading.
With everyone and their mother trading stock tips in the 1990s, brokers made increases in customer accounts and trading commissions that led to big profits.
Now, with fertile ground for day trading back in play, are the discount brokers worth owning in this environment?
Well, one would think that now would be an excellent time to be owning the discount broker stocks, but that hasn't borne itself out as of yet. What gives?
In the case of ETFC, the answer is pretty clear: The company lost its focus by trying to be a bank. That move into gathering deposits to lend to the mortgage market was a disaster, to say the least.
The leverage and debts used to accumulate assets that collapsed in value has nearly destroyed the company. It may still.
ETFC's share value collapsed to less than $1 per share as a result. Its 52-week high is above $5. With the company seeking $800 million in TARP money, its survival is in question.
Assuming it receives the money, ETFC may be worth considering from an investment standpoint. Obviously there is a high degree of risk, but its discount brokerage business has the potential to demonstrate impressive growth in the future.
Instead of horsing around with the government on a rescue package, ETFC should be promoting the heck out of the benefits of day trading. It is letting some great marketing opportunities slip by.
Even so, the company should see customer account growth as investors realize the benefits of trading this volatility.
Yesterday, ETFC announced that it added 26,000 new customers in November, and now can boast 4.5 million customers.
Daily average trading revenue was down slightly from the year-ago period, indicating that customers have yet to figure out that volatility can be traded profitably. That makes sense when you see that customer assets dropped by 42% to $110.1 billion.
Clearly, investors are gun-shy, but that is where the management of ETFC can step in and educate customers on the benefits of placing more trades.
Assuming the company can resolve balance sheet issues, taking a risk on ETFC may pay big rewards down the line.
Jamie Dlugosch is a contributor to InvestorPlace.com.
Reader Comments (Page 1 of 1)
12-23-2008 @ 11:04PM
Carol said...
Beware of opening an ETrade brokerage account. From what I can tell, their not even maintaining their brokerage application. Did they lay off all of their developers? For example, they offer an Automatic Investing option on their website, but if you try to sign up, they don't have the year 2009 in the drop down list to choose when to start your investing. Looks like their site hasn't been QA'ed in years. I wonder how secure it is....