I’m adding E*Trade Financial (ETFC) to the Growth Portfolio today.
E*Trade Financial offers financial brokerage and banking products & services; and also balance sheet management, including loans, deposits, payables and asset allocation.
E*Trade had a slow-growth year in 2015, with earnings per share (EPS) expected to increase just 3.6%. However, Wall Street anticipates future EPS will grow quite aggressively, at 33.6% and 21.3% in 2016 and 2017 (December year-end).
In 2016, the company should benefit from rising interest rates. As rates rise, investors commonly shift away from bonds toward equities, increasing transactional revenue for E*Trade. That’s because bond prices decline during periods of rising interest rates. Thus, bond investors shift their focus to investment categories that can preserve or grow their principal.
Rising rates also boost E*Trade’s net operating interest income, which currently represents about 60% of total net revenue.
2016 revenue is projected to increase by 22%, enhanced by higher daily average trading volumes, and continued growth in net new brokerage accounts. In addition, a 2015 departure from its mortgage loan business will improve E*Trade’s balance sheet.
The stock’s 2016 price/earnings ratio (P/E) is 19.2, way below the EPS growth rate, making the stock undervalued.
ETFC is a large-cap growth stock in the financial sector. Institutions own 95% of ETFC shares. Wow! That means professional investors overwhelmingly agree that ETFC presents strong capital gain potential.
The stock price hasn’t yet recovered from the 2008 financial meltdown, largely because the company lost money in five years during the 2007-2012 timeframe. The company was forced to make serious decisions about cleaning up its balance sheet, and focusing on profitable business activities. At this point, E*Trade Financial is solidly profitable, with prospects of strong earnings growth. The rising stock price and growing profitability reflect the constructive decisions being made by company leadership.
I think ETFC could easily surpass this summer’s annual high of 31.41 before the year is out. ETFC is standing at an open door of a trifecta of stock price catalysts: strong earnings growth, a market shift into financial stocks and prospects of the Fed finally moving on interest rates. Because ETFC is more volatile than most stocks that I recommend, this stock is most appropriate for risk-tolerant aggressive growth investors.
Rating: Strong Buy.