Discount Brokers Stocks Now Gaining Traction
The stock prices of discount brokers, especially E-Trade Financial Corp., increased last week as analysts upgraded their stock ratings because of positive trading trends and the return of investors into the stock market.
The rating of E-Trade was upgraded by Goldman Sachs financial analyst Daniel Harris from neutral to buy because of the improving status of the broker’s home equity loan portfolio and the improving trends in the brokerage business. E-Trade shares rose by 6 percent or 10 cents to reach $1.81.
Harris explained that he increased his estimated earnings per share for E-Trade to a loss of only 3 cents in the July to September quarter from his initial estimated loss of 8 cents because the E-Trade brokerage business has improved substantially.
The share prices of TD American Corporation, TradeStation and optionsXpress also increased, with TD American rising by 7 cents in morning trading to $19.55, TradeStation rising to $7.55, and optionsXpress rising to $17.25.
Meanwhile, the stocks of Charles Schwab Corp. were downgraded by Harris from neutral to sell. According to Harris, Schwab’s core revenue sources, namely interest income and asset management, are not expected to grow substantially because of the expected slowdown in short-term rates. He also added that Schwab will lag other major discount brokers in performance.
Additionally, many stock analysts are advising investors to buy E-Trade now because it may soon be acquired by another major discount broker. They said that at E-Trade’s current $1.84 share price, the offer could reach $3 to $4 per share.
FBR Capital also pushed up its price target for E-Trade from $2 to $2.25, explaining that E-Trade Bank has been improving its capital and credit status and E-Trade has been showing strong signs of recovery.
In the past months, investors have been turning away from E-Trade because of increasing delinquencies in its home equity line of credit portfolio, but in recent weeks, delinquencies in its $8.8 billion HELOC business and in its $11.4 billion multifamily portfolio have been improving.
Total delinquencies in multifamily loans increased by only 0.4 percent to $1.68 billion and loans past due by 30 to 89 days dropped by 6.2 percent to $528 million. Loans past due by 90 to 179 days fell by 9.2 percent by $404 million.
Citigroup also upgraded its E-Trade Financial and raised its price target to $2.30 from $1.50. The interest of other major discount brokers in taking over E-Trade also increased because of its improved financial performance.
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