E*Trade Craziness

Posted: August 15th, 2007 | Author: saldarji | Filed under: business | No Comments »

As I have mentioned before, I am very bullish on E*Trade (ETFC) and have purchased shares. However, despite my optimism, they have gotten pounded in the market. Their stock price has declined from 22 dollars to 14 dollars this year.

I believe that the fears are completely unfounded and that right now people are trading on emotion. The initial decline was due to fears that E*Trade has above-average exposure to sub-prime mortgages. Atleast, this is the story in the WSJ by Herb Greenberg. Apparently a “subprime” mention on CNBC today sent the stock down over $1.25 during trading hours today. This story today elaborates on the pessimism.

Here is a paragraph from that article:

Citigroup analyst Prashant Bhatia lowered his 2008 and 2009 earnings estimates on E*Trade on Monday. He also lowered his price target from $23 to $19, saying the brokerage and financial services company has not provided adequate information on the “composition, source and quality of its $28 billion mortgage portfolio.”

Let me address Mr. Bhatia with a quote from the most recent 10Q filing.

In recent months, there has been considerable attention in the financial media regarding rising delinquencies and default rates in the sub-prime(Defined as borrowers with FICO scores less than 620 at the time of origination.) lending market. As a general matter, we do not originate or purchase sub-prime loans to hold on our balance sheet; however, in the normal course of purchasing large pools of real estate loans, we invariably end up acquiring a de minimis amount of these loans. As of June 30, 2007, sub-prime loans represented less than one-fifth of one percent of our total loan portfolio.

They also break out the their first-lien mortgages ($15.667B) from their HELOCs ($12.413B). Obviously, we’d all love to have more information on the quality of those loans, but the above information satisfies me that they do not have drastic sub-prime exposure.

I believe that what some analysts fail to realize is that E*Trade is no longer just a discount broker. And they are not just an electronic bank either. They have a business model where they are a little bit of both. What both of those models have in common is that they make money off of “float”. They need to invest their assets in order to make money.

Not all analysts are negative.

Deutsche bank analyst Matthew Fischer said E*Trade’s loan portfolio appears “healthy,” because net charge-offs and loans during the second quarter declined sequentially by one basis point, while regional banks saw an average increase of seven basis points in their net charge-offs.

I believe that the “subprime slime” fears around E*Trade are overblown and that the stock should recover in the coming months and years.

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