Why You Should Invest in E*Trade Before It's Too Late

by Louis Basenese

Why You Should Invest in E*Trade Before It's Too Late

by Louis Basenese, Advisory Panelist

Thursday, September 17, 2009: Issue #1095

Ask most investors about E*Trade and you'll get a mouthful about why the company is a toxic asset to be avoided at all costs.

I can't say I blame them. After all, the company did make a foolish foray into the real estate lending business. And it did so at precisely the wrong time - the top of the market. In turn, like many banks, it got sacked as loan losses mounted.

At that point, forget a takeover. Bankruptcy appeared more imminent. And the stock quickly reflected this widely held belief, plunging by 95% from its 2007 high to trade below $1.

Unsurprisingly, many investors sprinted away from the company. But here's what most of them don't understand: Beneath the muck of E*Trade's real estate operations, it possesses a valuable asset - its brokerage business...

For example, even during aterrible year for stocks in 2008, E*Trade still managed to grow its account base by 6% and added $6.4 billion in customer assets.

It wasn't a fluke either. E*Trade has continued to grow its brokerage business in 2009.

CEO, Donald Layton, sums it up: "Our online brokerage business is thriving... volumes are up versus last quarter, our average commission per trade is higher, and interest spreads are much improved."

If it weren't for the company's real estate operations, shares would be soaring based on such comments. But therein lies the opportunity.

A Risk Worth Taking for E*Trade's Rivals

With real estate operations weighing down its share price, suitors like TD Ameritrade (Nasdaq: AMTD) and Charles Schwab (Nasdaq: SCHW) can scoop up E*Trade's most valuable asset at a steep discount. Both companies certainly possess the stability and financial resources to pull off a deal.

So what's the holdup? Nothing... anymore.

I'm convinced that the only thing holding up a takeover is the uncertainty surrounding E*Trade's real-estate loan portfolio. But that obstacle is quickly disappearing.

On Monday, E*Trade revealed that delinquencies continue to drop. In fact, over the past two months, delinquencies for its home-equity portfolio (its largest exposure) fell by another 7%, having fallen by 10% in the prior period.

Meanwhile, overall delinquencies remained flat, clearly indicating that E*Trade's real-estate portfolio is stabilizing.

When we factor in all the capital the company raised to insulate itself from further losses, the risk to potential suitors appears manageable. And if suitors don't act quickly, they'll miss out on the opportunity to buy E*Trade's brokerage assets at a discount. Shares have already tacked on 11% this week.

Here's why I'm believe the situation is even more urgent for us...

Why You Should Invest in E*Trade Today

A few weeks ago, E*Trade's largest shareholder, Citadel Investment Group, scrapped plans to start unwinding its position. The move suggests a deal is in the works. Why else would the firm have such a sudden change of heart?

The rumor mill continues to heat up about the possibility of deal. And a strong uptick in call options trading adds credibility to the rumors. In fact, a Yale University study confirms that heavy spikes in options trading precede takeover announcements.

Most compelling of all, TD Ameritrade CEO, Fredric J. Tomczyk, said on Monday that he expects more consolidation to come in the industry.

Since his company is one of the most obvious buyers, he could be foreshadowing a deal. And at such an attractive price, E*Trade represents a risk worth taking for him... and us.

Bottom line: With the real estate risks subsiding, a takeover offer could come any day now for E*Trade. And if you don't buy shares today, you might not get another chance.

Good investing,

Louis Basenese

comments powered by Disqus