E*TRADE Financial (ETFC)

Their Retail sector is quite strong and managed well. Recently, the supervisor of investment banking and retail, Donald Layton, was named the CEO. Layton seems like the perfect fix to improve the investment banking side, which seems to be in need of some fix.

Moreover, by moving into the online retail banking industry E*Trade can attract assets through checking, savings and money market accounts. These accounts could increase assets in ways that non-retail banking competitors cannot.

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^[1].

1. ↑ "E*Trade (Nasdaq: ETFC): Why You Should Buy This Stock Before It’s Too Late" Article from InvestmentU

Similar to SIRI, the crash of the stock market, brought on legitimate worries for investments in companies with questionable debt loads. E-Trade's numbers were far superior to the original analyst predictions. If one has the bravery to take on a company with a great product, but not so great finiacial records; they may realize while counting their profits, that Consumers in an area such as personal investments can research and find companies, which have suffered due to financial panic, and therefore may ride them back to their correct position in the Market

E*Trade has one of the (if not the) strongest brands 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 and bear markets. Once the investment side is all cleaned up, it’s smooth sailing for E*Trade. Furthermore, Net revenues have been growing annually at a solid 12% pace since 2003.

You have to give a lot of credit to the marketing department for making trading cool to the younger folk.

E*Trade's shift towards asset-based revenue streams will remove some of the volatility associated with the commissions-based revenues that arise through general market swings.

Lets face it a lot of things are about promotion and making a name stick in the minds of people and as far as these online investment companies go E-trade is one that comes to mind right away, because of those crazy, cute baby commercials.

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 anybody 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.

Looking forward earnings-wise, the average quarterly earnings estimate for ETFC's June '08 quarter is presently calling for a loss of about $0.12 per share. While the estimates are in a wide range, the firm has stabilized its losses and axed what they needed to ax, and within the next six months there will be some good news here as the firm focuses on executing in their core niche - online trading. Next year, the full year of 2009, this company is expected to earn right around $0.11 per share, according to the 14 analysts who cover the firm. Revenues are expected to grow from $1.45 billion this year, to over $1.7 billion next year, a gain of over 19%. The metrics look good, especially as this firm focuses on its core business.

Implied volatilities in the options on ETFC remain elevated as a result of that downswing, and today you can sell the January 2009 $5 call options for a tidy $0.70 (mid-range of the current bid/ask). On a "static" basis, if the shares of ETFC don't move from the $4 level, that $0.70 premium would yield you 17.5% on a $4 stock between today and January '09's expiration. If you're called away at $5, you would gain the $1 appreciation, plus the $0.70 premium, for an "if called" yield of over 42%.

As of March 06, 2008; 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 $4.02 (as of the same day), 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.