E-Trade (ETFC) has gone down in price like many financial companies in 2011. But with the financials looking so dim, we do not believe they are a good long-term investment right now. There is an option trading opportunity but look at two key financial ratios that make us shy away from E-Trade as a long-term investment right now.
E-Trade Financial Corporation, together with its subsidiaries, provides online brokerage and related products and services primarily to individual retail investors in the United States. It offers trading products and services, including automated order placement and execution of the U.S. equities, futures, options, exchange-traded funds, and bond orders; sweep deposit accounts; access to E-Trade Mobile Pro to trade stocks and transfer funds between accounts, as well as to monitor real-time investment, market, and account information; access to Power E-Trade Pro, a desktop trading software for active traders
E-Trade's Financial Strength
I like viewing three different financial ratios to get an idea of ETFC and its financial strength. The first is the debt/equity ratio. This allows me to get an understanding of what proportion of equity E-Trade is using to finance its assets. The higher the ratio, the more financing is taking place through debt. E-Trade is about right at industry average (1.88 to 1.92). This just means it is average, and working just like the average company in its industry.
And the second most important thing to look at is a company's ability to pay the interest on its debt. Who wants to invest in a company that can barely pay its interest while its debt just grows fat and happy? This is called the Interest Coverage Ratio. The lower the ratio the higher the burden of debt is on a company. The ratio for E-Trade is 1.90, while the industry average is much higher at 8.80. ETFC does not appear to be handling its debt as good as other companies in its industry. We do not like where ETFC is in terms of financial strength. It appears to be about average, but in terms of paying off its debt, it sits at the lower end of its industry, well below the industry average. This is not a good growth stock!
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Along with its long-term downward trend, this dismal financial picture does not make E-Trade an appealing stock for long-term investors now. But, we believe ETFC provides ample opportunity for traders to make money through a medium-term options trade. If one looks at the weekly charts it appears that E-Trade is establishing a foundation. As it moves down again and bounces off that 6.9 level, look at buying a 2012 call option about three months out. As an example, if it bounces off that mark in February or March, you might buy June '9' option. A play like this is a straight option buy.
Disclosure: ETFC Long Term, Options
