E*Trade Financial (NASDAQ:ETFC): Laying Foundation for Success
The past quarter has been extremely interesting for E*Trade Financial Corporation’s (NASDAQ:ETFC) investors, board members and management. In an industry plagued with bad news and an asset portfolio heavy in mortgages, it has investors shaking in their boots. But as others are fearful, now is the time to get greedy. With a New CEO, a clear strategy to clean up the balance sheet, and below book value prices for shares of E*Trade - the upside is looking great.
Non-executive chairman Donald Layton (former J.P. Morgan supervisor of investment-banking & retail operations) has been named CEO of E*Trade Financial. Not surprising - considering E*Trade retail operation is extremely profitable and their investment-banking side is in need of serious help - Layton seems like a perfect fit to fix this company’s balance sheet.
Now, I can’t not mention that E*Trade currently has about $12B in home equity loans, which will hurt in the upcoming quarters. Further significant write-downs could put a lot of pressure on the company’s earnings and on it’s liquidity. Investors don’t like this, and it’s currently reflected in the stock price.
Because of this reflection, I’m very excited! Buying companies at roughly their book value in general gives you a good idea on how to justify your purchase, especially for a novice investor. As it stands right now, assuming E*Trade home equity loans hold up to $12B (which will probably drop in value), the book value is $6.12 / share. When the share price is at $4.15 (as of today) - this tells me that the price of further write downs are already priced into the stock, giving you some buffer room when that news hits the fan.
At the end of the day - E*Trade has one of the, if not the strongest brand in the online discount broker space. On top of their strong brand is one of the best trading platforms available online. Behind the brand and the platform, is an extremely profitable retail business model, where E*Trade makes money in both bull & bear markets. Once the investment side is all cleaned up, it’s smooth sailing for E*Trade. All aboard!
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Disclosure: Author has a long position in E*Trade Financial Corporation (NASDAQ:ETFC)
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