Stock Ideas 
Investing Ideas The Carnage Has Been Overdone: When Cramer Says Sell, I Look to Buy
Investing Ideas The Carnage Has Been Overdone: When Cramer Says Sell, I Look to Buy 
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By Jonathan Kolber Almost every day there is a new technology that could change the world as we know it. But we all know that only one in a thousand actually do… Here we have that one. |
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| The Carnage Has Been Overdone: When Cramer Says Sell, I Look to Buy |
| Thursday, 31 January 2008 | |||||||||
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I’d like to focus today’s alert on winning speculation. You see, the key to winning speculation is to risk as little money as possible to make the biggest return. And that perfectly describes the opportunity I’ll be presenting you today in E-Trade Financial (ETFC: Nasdaq). Now, I’m sure you’ll be skeptical. After all, I was skeptical myself when this investment opportunity was first presented to me. But when you really look closely at this opportunity, you’ll see that this investment thesis makes a lot of sense. We’ll begin by looking at the stock movements of some of the top mortgage lenders. On July 10, 2007, Fannie Mae (FNM: NYSE) closed at $66.49. Today it trades for $32.32, good for a 51.4% loss. Also on July 10, 2007, Countrywide Financial (CFC: NYSE) closed at $37.34. Today it trades for $5.01, marking an 87% loss. So, two of the biggest mortgage lenders in the country have lost 51% and 87%, respectively, of their value since July 10. Now remember, FNM and CFC are companies with business models surrounded entirely in lending -- and their recent stock price movements have been rather painful. But now let’s consider E-Trade. On July 10, 2007, E-Trade closed at $ 22.93. This week, it traded for $4.38, giving it an 81% loss! In fact, this was E-Trade’s lowest level since 1996, making them the worst performer on the entire Standard & Poor’s 500 index! When I see a reaction like this, I can’t help but think that Wall Street is treating E-Trade like a mortgage lender -- not an online stockbroker. Now I admit, the company got caught up in business segments that it should not have been involved in, notably the subprime lending sector. And as a consequence, the stock is paying dearly. But as I write you today, there is a good chance that all of the bad news has now been factored into the stock. When E-Trade reported its Q4 earnings on January 24, it unveiled full details of its new restructuring plan aimed at reducing balance sheet risk and lifting shares off their all-time lows. In fact, some rather important moves have already been made. In November, for example, ETFC sold a portion of their mortgage portfolio to Citadel Investment Group and secured a $2.55 billion cash infusion. This sale included a combination of mortgage securities and municipal bonds, and substantially reduced its debt levels. E-Trade also recently sold $3 billion of mortgage-backed securities and municipal bonds, which got it off the hook of these obligations for the manageable loss of just under $5 million. Not only that, but the company will also exit its institutional trading business, which means E-Trade will solely focus on what it should’ve been focusing on all along: its retail banking and brokerage operation.
This re-focus is once again attracting investors to the stock. Since hitting a low of $2.08 on January 8, the stock has rallied all the way up to $4.44. That’s a 113% gain! And considering the stock’s $23.00 price in July 2007, the potential gains are far from over. I feel that a recommitment to its online brokerage business -- combined with the elimination of its troubled business operations -- could be all it takes to spark a turnaround in the shares. Heck, all you need is the stock to move up to $7 and you’ll have a 58% gain on your hands. You could easily see this type of reaction in the first three to six months of the year. Think that type of upside move is impossible? Well, consider this comparison... E-Trade has a P/E ratio of 2.82. That is ridiculously low when compared to Charles Schwab’s P/E of 11.59 and TD Ameritrade’s P/E of 18.00. On the same hand, E-Trade’s price-to-sales ratio of 0.48 also looks ridiculously low compared to Schwab’s P/S ratio of 5.53 and TD Ameritrade’s P/S ratio of 5.51. Plus, in terms of profitability, E-Trade’s trailing three-month revenues of $2.11 billion actually came in higher than TD Ameritrade’s three-month revenues of $2.06 billion! When you see valuations like this, a $7 price target seems very reasonable. After all, if E-Trade can get its current valuations to just half of those of TD Ameritrade or Charles Schwab, then ETFC could quickly jump 50% to 100% by Q3 2008. That’s why I feel it’s worth a shot to add a small position at these levels. Now remember, this is a pure “recovery” play that has the ability to jump rather quickly. And therefore, the best way to play E-Trade is to use longer-dated call options. One of the very best “speculative” plays you can make right now is buying the ETFC January 2009 $5 calls (ONY AA) for under $1.40. If ETFC trades up to $7, these calls could move up to $2.70, good for a 92% gain. For only $1.40 per contract, I feel that’s well worth the price! Sincerely, Bryan Source : Market Report This e-mail address is being protected from spam bots, you need JavaScript enabled to view it
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