ETFC's Back on its Feet

ETFC's current price of under $4 reflects an extreme level of distress that I think is unwarrented and should start to dissapate in the coming months. However, it does not seem that anyone else agrees with me! The stock currently has around a 20% short interest and tons of negative analyst coverage. I view this as a positive. It provides the fuel for a sharp turnaround in the stock price by making any less than terrible news seem positive.

While there are still challenges in front of the business, it seems that management has already done what is necessary to take bankruptcy off the table. This includes a 2.5 billion dollar cash infusion from Citadel Investments, raising cash through the sale of non-core assets, and reducing debt levels. Furthermore, they have also announced that they are exiting the retail mortgage origination business. The goal of these actions are clear: reduce risk and get back to basics. I believe that this strategy has already started to stabilize the business and will lead to further growth in the near future.

E-trade is not only taking steps to stabilize itself but also to grow as well. To jump start growth, E-trade's management has invested in advertising including a Superbowl commericial that received tremendous response. Although management has indicated that advertising was front loaded to the beginning of the year, these popular commercials continue to run and could continue to draw in new customers. Furthermore, while bankruptcy threats errode, old customers may come back on board in order to take advantage of E-trade's more advanced platform. It is clear, as even the CEO of Ameritrade recognized, that any customer's looking to leave E-trade have already done so, leaving ETFC looking at growth, not further customer losses.

E-trade is a strong brand that got mixed up in a nasty business. Although damage has been done, I'm confident management is on the right track and will lead the business to start regaining its once prominent role as a leader in the online brokerage community. The upside is wide open here while the downside looks to be fairly limited (It's hard to imagine further negativity). Thus, I think the stock is a buy at current levels.