E*Trade Revises Estimates

I have to admit that I was wrong on E*Trade. Specifically I was wrong about their exposure to bad mortgages. The stock has lost some value from the 15-dollar range where it settled and is trading down in the 13.50 dollar range. This is due to the news that E*Trade will be revising their earnings estimates
downwards.

There were a lot of market-rumors (subprime exposure, a run on the bank, etc.) that drove down the price to the 15 dollar level. The mistake I made is that I assumed that their AAA-rated Commercial Mortgage portfolio was safe. It is unfortunate that the rating agencies did not perform their end of the bargain. I read a statistic somewhere that 90% of all the mortgage-backed
securities were rated AAA by the agencies.

Another mistake in my analysis can be summed up by my brother, who pointed out that “FICO scores mean shit.” I should have listened to him. A portion of E*Trade’s portfolio, even though it was backed with high FICO scores and rated AAA, was in secondary mortgages, HELOCs and installment loans. These are expected to have a higher-than-average rate of default.

Despite the bad news their earnings estimates are still expected to come in between $1.05 and $1.15. That would put their trailing P/E right around 12. I still believe that the company is a good buy. Their core businesses in brokerage and banking should continue to thrive. They also continue to be a good suitor for TD Ameritrade. It will just take a lot longer for them to recover to their previous levels.