If there is definitely one stock to avoid these days, it's E*Trade (NASDAQ: ETFC). I went back and forth on it over the summer, wondering if it was worthy of a trade at certain points, but after the broker's Q3 earnings report, I just don't have any good feelings about it right now.
Total net revenue declined over 21% to $377.7 million. The net loss per share from continuing operations on a diluted basis plummeted over 300% to $0.60. E*Trade, as we all know, has been a victim of the whole financial debacle. It's provision for loan losses was $517.8 million in the third quarter. This compares to a provision of $186.5 million in the previous year's similar quarter.
E*Trade states in its release that it is trying to further reduce its exposure to risk and it's keen on shoring up the balance sheet. Good attitude, I suppose. Also, daily average revenue trades for Q3 were up 7%. But it doesn't mean anything. This was a terrible quarter. The data is both horrible and telling.
It's a simple proposition for me: stay far away from E*Trade. Sure, there will come a time when the stock might make for a good investment, but that's a long way off. Technically, the stock is weak. And the broker will be unwinding its exposure to the financial markets for a while.
Wall Street's optimism in last week's preview about the earnings of tech stocks wasn't misplaced, as there were many more positive surprises than negative ones among the stocks we looked at. This week will bring plenty more data for investors in and watchers of the sector to mull over. Apple Inc. (NASDAQ: AAPL), AT&T Inc. (NYSE: T), and Microsoft Corp. (NASDAQ: MSFT), for example, are expected by analysts surveyed by Thomson Financial to post modest earnings gains from a year ago, to $1.11 per share (on $8.1 billion in sales), $0.72 per share (on $31.3 billion in sales), and $0.47 per share (on $14.8 billion in sales) respectively. All three of these companies ended the week closer to their 52-week lows than highs, and analysts on average consider them each a buy.
Here's a look at some of the week's biggest expected earnings gainers and decliners in the sector:
Baidu.com Inc. (NASDAQ: BIDU): $1.25 per share (+44.0%) on revenues of $134.7 million (+103.2%)
Broadcom Corp. (NASDAQ: BRCM): $0.44 per share (+38.6%) on revenues of $1.3 billion (+33.8%)
QLogic Corp. (NASDAQ: QLGC): $0.31 per share (+29.0%) on revenues of $170.0 million (+21.2%)
FLIR Systems Inc. (NASDAQ: FLIR): $0.32 per share (+28.1%) on revenues of $275.2 million (+44.0%)
Juniper Networks Inc. (NASDAQ: JNPR): $0.30 per share (+26.7%) on revenues of $927.4 million (+26.2%)
Waters Corp. (NYSE: WAT): $0.75 per share (+17.3%) on revenues of $391.6 million (+11.1%)
It turns out that Charles Schwab (NASDAQ: SCHW) and TDAmeritrade (NASDAQ: AMTD) may have sold auction-rate securities by using misleading marketing about whether or not the instruments were "cash equivalents." According to The New York Times, the "point of sale" activity at the discount and retail brokerages is similar, they said, and some of the discount brokerage firms use financial advisers or may have improperly listed information on their websites.
Schwab argues that it was only an "agent" and did not slant the marketing of auction-rates one way or the other.
It is safe to predict that Andrew Cuomo, the New York State Attorney General, will get discount brokerage firms to buy the auction-rate paper back from their customers. Cuomo can probably find some marketing material where the nature of the securities was represented the wrong way.
But, Cuomo's actions have stepped over the line. In all probability, many discount brokerage customers bought the auction-rates on their PC without seeing any information about whether their liquidity could be undermined. Discount brokerage customer often do their own research.
Cuomo won't care. He won't try to find out which people got their auction-rates without being attracted to them by marketing. He will get the discount firms to buy all of the paper back. The companies do not want years of litigation.
Cuomo is running for governor, or perhaps the U.S. Senate. He does not have time to pause for such details.
Douglas A. McIntyre is an editor at 247wallst.com.
Talk about an interesting day for E*Trade (NASDAQ: ETFC). The broker, a competitor of TD Ameritrade (NASDAQ: AMTD) and Charles Schwab (NASDAQ: SCHW), reported Q2 earnings on Tuesday after the market closed. E*Trade saw its stock close up on the day by almost 11% on better-than-average volume ahead of the press release. Then, after hours, the stock was down over 15% as investors digested the data. It was a wild ride indeed, and I'm glad I wasn't on it.
E*Trade saw its total net revenue decrease by 20% to around $532 million. The loss per share came in at 19 cents. According to this Reuters article, Wall Street was hoping the loss would only be 14 cents per share.
E*Trade isn't out of the woods yet, and I think it'll be a while before it fully turns itself around and recovers from the financial crisis it's been suffering. In fact, the release mentioned how the broker lost value on investments in preferred equities of Federal National Mortgage Association (NYSE: FNM) and Federal Home Loan Mortgage (NYSE: FRE) in July and that the liquidation of the investments will impact the third quarter. Yeah, I'm sure shareholders of E*Trade love to hear the names Fannie Mae and Freddie Mac thrown around in the earnings report. They're sure to warm the heart.
At one time, I thought E*Trade was worth entering, and it obviously might have been worth trading ahead of the earnings (if you were quick to get out before the after-hours, that is). Now, however, I'm reticent to put any new money to work in the financial sector. It's going to be a while before the financial malaise finally lifts. Since E*Trade is still losing a lot of money and missing estimates, I see no reason to allocate any investment funds here. The stock has become too speculative, and if you want to speculate, I'm sure you can find safer sectors to place some bets.
Disclosure: I don't own any company mentioned; positions can change at any time.
TD Ameritrade Holding Corporation (NASDAQ: AMTD) reported earnings for its second fiscal quarter yesterday, and they were pretty decent for the most part -- some might have thought that investors were completely shunning the market because of all the volatility going on, but TD Ameritrade's results show that a broker can still make money in such a challenging climate.
Even so, overall revenues declined 3% to $623 million. While transaction-based revenues also declined, it should be noted that average client trades per day did increase 23% to 312,000. That's an important measure when talking about brokers such as TD Ameritrade, or competitors such as E TRADE Financial Corporation (NASDAQ: ETFC) and The Charles Schwab Corporation (NASDAQ: SCHW). Earnings per share really shined, rising 35% to $0.31 per diluted share.
TD Ameritrade is sticking to its earnings guidance of a "midpoint forecast of $1.32." Of course, I'd like to see raised guidance, but a reaffirmation is certainly better than a reduction in guidance. Besides, I have to go back to the challenging climate concern -- if TD is happy to keep the forecast right now, then this is definitely positive. Investors would probably do well to at least investigate the brokers. When the economy snaps back, they should rally higher from these levels. TD Ameritrade, while not right up against a 52-week high, actually isn't that far from it, interestingly enough.
Disclosure: I don't own shares in any of the companies mentioned here; positions can change at any time.
MOST NOTEWORTHY: Goldman Sachs, Lehman and TD AmeriTrade were today's noteworthy downgrades:
UBS downgraded Goldman Sachs (NYSE: GS) to Neutral from Buy. The firm believes liquidity problems and de-leveraging in the capital markets will get worst before they get better; UBS also downgraded Bank of New York (NYSE: BK), State Street (NYSE: STT) and Invesco (NYSE: IVZ) to Neutral from Buy.
Following Bear Stearns' (NYSE: BSC) downfall, UBS also downgraded Lehman Brothers (NYSE: LEH) to Neutral from Buy and said the company could be the "next on the list" for the confidence/liquidity crisis by some investors.
TD AmeriTrade (NASDAQ: AMTD) was downgraded to Neutral from buy at UBS and to Market Perform from Outperform at Friedman Billings. Friedman Billings downgraded TD Ameritrade citing slowing client activity as well as margin compression.
OTHER DOWNGRADES:
JP Morgan cut Portugal Telecom (NYSE: PT) to Underweight from Neutral.
Goldman downgraded Marathon Oil (NYSE: MRO) and Holly Corp (NYSE: HOC) to Neutral from Buy and removed Frontier Oil (NYSE: FTO) from its Conviction Buy List.
Short sellers trading stocks listed on Nasdaq made big bets against cable and financial shares, according to data from January 15. The numbers compare to short interest in the same companies on December 15, 2007.
The short interest in cable company Charter Communications (NASDAQ: CHTR) moved up 4 million to 99.3 million. Charter's stock has fallen close to $1. It carries $19 billion in debt and there is a growing concern that operating profits will not cover interest. Controlling shareholder Paul Allen may have to put more debt into the company.
Short interest in Comcast (NASDAQ: CMCSA) rose almost 600,000 shares to 45.1 million. After hitting a record high last year, shares of the nation's largest cable company have fallen one-third on concerns that large telephone companies will take its TV and broadband subscribers with their new fiber-to-the-home products.
Short interest in E*Trade (NASDAQ: ETFC) moved up 9.9 million shares to 91.2 million. The market is obviously willing to bet that there are more problems with the company's balance sheet. Short interest in healthier rival TD Ameritrade (NASDAQ: AMTD) fell 5.1 million to 8.6 million shares. The market is not shorting the discount brokerage industry, just the weakest company in the group.
Douglas A. McIntyre is an editor at 247wallst.com.
TD Ameritrade Corp. (NASDAQ: AMTD) saw a Q1 net income growth to the tune of 65% [subscription required] as more of its retail customers placed trades in the turbulent market during the final quarter of 2007. That's not all, though: the company said 2008 earnings would be better than its previous outlook.
In perfect market fashion, the company's shares rose slightly and then tanked over 4%. AMTD shares stand at $18.08 as of 12:27 p.m., down 4.79% from yesterday's close. This, after the company reported a 65% net income rise in its Q1's fiscal period, with $240.8 million in net income or $0.40 per share and shares indicated up over 4% in premarket trading.
For the trading company's Q1 period, it reported an average of 321,736 client trades per day -- up 35% from the year-ago quarterly period. Seeing as though the final three months of 2007 saw some wild swings in tech stocks (among other sectors), TD Ameritrade's customers were on an apparent trading frenzy of sorts.
However, the company reported that client assets fell 0.8% to $300.4 billion for the quarter ended December 31st. The total includes $47 billion in cash and money market funds within all consumer client accounts. All those consumer trades, all those assets, and a brighter 2008 outlook -- and AMTD shares go down as a result. You have to love the market's interpretation of good results.
As investors throughout the world get ready to usher in 2008, here is a stock pick that looks like it will be a big winner.
TD Ameritrade (NASDAQ: AMTD), the online broker, looks like it will be the big winner in the E*Trade (NASDAQ: ETFC) fiasco. TD Ameritrade looks to pick up a whole bunch of accounts from the shamed online broker. In addition, after some clarity is shined on just how bad E*Trade's financial situation is, I would expect TD Ameritrade to swoop in and gobble up the retail brokerage business of E*Trade. They are sure to acquire it on the cheap, which makes TD Ameritrade all the more attractive.
With a PE under 19, and the stock trading just off the 52-week high, the stock has been hanging in during a period when the rest of the financials have gotten clobbered. Look for TD Ameritrade stock to be a strong performer in '08.
Aaron Katsman is the lead Portfolio Manager and Managing Director of America Israel Investment Associates, LLC. and Senior Editor of IsraelNewsletter.com. DISCLOSURE: Writer has no position in any stock mentioned as of 12/30/07.
A look at the Nasdaq short interest on December 14, compared to November 30, shows that bets against discount brokers rose sharply. Short interest in E*Trade (NASDAQ: ETFC): moved up 3.9 million shares to 53.7 million, according to data from the exchange. That might have been expected, given the financial company's problems with mortgage related securities.
But, shares short in TD Ameritrade (NASDAQ: AMTD) jumped 8.2 million shares to 17.8 million, and short interest in Schwab (NASDAQ: SCHW) moved up by 6.1 million shares to 28.7 million. Both figures are a fairly large percentage increase.
The simple explanation for the rise may be that both stocks have done better than financial shares as a whole and are ready for a pull-back. Schwab's stock is up over 30% this year. Ameritrade is up just under 25%.
But there are two other possible explanations, both a bit more unsettling. One is that a bear market would likely hurt earnings at discount brokers. A recession early next year could cause individual investors to pull in their horns. The other theory is that the two firms could have balance sheet problems of their own. This is less likely, since neither company has made any disclosures to that effect.
Whatever the reason, a fairly large amount of money is being gambled that the discount brokerage stocks have peaked.
Douglas A. McIntyre is an editor at 247wallst.com.
CNBC is reporting that Schwab (NASDAQ: SCHW) and TD Ameritrade (NASDAQ: AMTD) may be in talks to buy troubled discount broker E*Trade (NASDAQ: ETFC). The news has pushed up E*Trade shares as much as 23% to $5.25.
The problem is that if the broker's mortgage securities investments are as severe a problem as some analysts think, the company may not be worth more than the $3.46 where the stock traded a few days ago. Those buying into the rally could be burned if an offer is well below the current price.
Any deal would probably be based on selling the customers of the discount brokerage unit and keeping the damaged securities on the balance sheet within the remaining public company. There is no guarantee that the cash paid for the customer base would not be eaten up if the market for these distressed securities drops further.
E*Trade may be worth over $5, but it could also be worth a lot less.
Douglas A. McIntyre is an editor at 247wallst.com.
E*Trade (NASDAQ: ETFC) was worth over $10 billion when its stock traded at $26 in June. Now its market cap is only $2.3 billion. That could make it a great takeover target for another broker -- great, if another firm could figure out how to firewall the failing mortgage assets in E*Trade's banking operation. But Wall Street has solved tougher financial engineering problems.
Yesterday, the head of TD Ameritrade (NASDAQ: AMTD) indicated that his firm might be a buyer of E*Trade's brokerage customer business. Based on the value of ETFC's stock in the recent past, it could be an extremely valuable operation.
"We like their retail business but we must figure out a way that makes sense for both sets of shareholders," TD Ameritrade CEO Joe Moglia told CNBC late yesterday. Putting together two discount brokers would clearly allow for savings in personnel and marketing costs. Putting together the IT of two different trading platforms can be a nightmare.
Selling E*Trade for under $6 would be painful, and it might be ill-advised. The company may still work itself out of its hole. That would point to trying to get a large investor instead of selling off the company's most valuable piece. The risk to shareholder there, of course, is that the company's exposure to mortgage-related assets pull the whole firm under.
Douglas A. McIntyre is an editor at 247wallst.com.
TD Ameritrade CEO Joseph Moglia was an executive at Merrill Lynch (NYSE: MER) in the 1980s and 90s. Moglia has been mentioned as a potential candidate to lead MER.
AMTD over all option implied volatility of 42 is near its 26-week average of 43 according to Track Data, suggesting non-directional risk.
Daily options Update is provided by Stock Specialist Paul Foster of theflyonthewall.com.
If there is definitely one stock to avoid these days, it's E*Trade (NASDAQ: ETFC). I went back and forth on it over the summer, wondering if it was worthy of a trade at certain points, but after the broker's Q3 earnings report, I just don't have any good feelings about it right now. 
Wall Street's optimism in 
As investors throughout the world get ready to usher in 2008, here is a stock pick that looks like it will be a big winner. 
CNBC is reporting that 
TD AmeriTrade Holding Corp.
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