E*Trade Madness

E*Trade Logo

It’s absolutely mind-boggling to me. Currently, E*Trade Financial Corp stock is trading at $3.60 a share. The share price has been knocked down by $5 today! Before today, it was over $8 a share; a month ago over $13; 6 months in the mid $20 a share. In other words, E*Trade’s market capitalization has dropped from over $10b to about $1.5b in just a matter of 6 months!

Today’s E*Trade drop off was caused, largely in part, by Citigroup analyst Prashant Bhatia. Does this analyst have a hidden agenda? Since E*Trade’s market value dropped significantly, couldn’t Citigroup just scoop up E*Trade stock or the entire company at a bargain price? This seems like a little bit of manipulation of the market. I guess this occurs all the time in the financial markets and might be viewed as standard procedure, but I don’t like it. It seems like a conflict of interest to me.

Additionally, as the Federal Reserve has not been able to alleviate the mortgage crisis, so far, E*Trade has been hit particularly hard. However, E*Trade has diversified its portfolio between: loans, banking, retirement planning, investing and trading. Loans, alone, should not cause so much damage to their net worth. E*Trade is a full, financial service. They are no longer just a brokerage; their diversity [theoretically] should insulate their multiple revenue streams from each other.

However, fear magnifies everything. E*Trade’s P/E ratio is an astoundingly, low 3.6, while its earnings are projected to be over $1 a share for 2007. It’s either bankruptcy, a correction, or a buyout. If there is a correction or buyout shareholders buying in, today, will be big winners.

E*Trade has an amazing, trading infrastructure. Their high-speed technology is some of the best in the industry. It competes with Charles Schwab and Ameritrade, who have not been ingrained in subprime loans, thus, have not had their net worth affected.

Is E*Trade a bargain? Does E*Trade have a great enough “margin of safety?” How do you know if its stock price won’t go down further. How do you know if it’s just market sentiment and irrational fear that has driven the stock down? I suspect there will be a big correction and payout if E*Trade survives this market madness.

It reminds me of what Warren Buffett once said: “I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” – lecturing to a group of students at Columbia University. He was 21 years old.