This post is part of my series featuring established companies and the smaller, more aggressive or innovative rivals that may eventually succeed them.
The expression was good for decades: "Wall Street to Main Street," as Merrill Lynch (NYSE: MER) was indeed the nation's premier brokerage firm to individual investors. That mantle is in serious jeopardy as "Mother Merrill" has encountered a horrible period in its illustrious history. Many wonder if Merrill Lynch will be able to survive as an independent company or be acquired by a larger bank.
Merrill Lynch replaced inept CEO Stanley O'Neal back in October 2007 "after one bad quarter." One rule of investing is there is rarely just one bad quarter for a troubled company and Merrill is proving this. The company actually lost over $10 in earnings per share in 2007, and 2008 will be lucky to break even. The subprime mortgage and other riskier credit strategies have been the undoing of Merrill Lynch.
Coming up fast and preparing to take the title of "Main Street's firm" for individual investors is Charles Schwab (NASDAQ: SCHW). This San Francisco-based firm has stayed true to its business model since its founding in 1971 by Charles Schwab. He firmly believed then and still does, that investors need choices and a low price of execution. Schwab offers several investment products primarily to individual investors and small institutions. The firm has migrated these past 10 years to an outstanding web-based model, allowing investors to access their account information 24/7. Transaction costs are among the lowest and advice is available. The advice is not pressure-packed, but rather informative.
Charles Schwab (NASDAQ: SCHW) shares are trading higher after the company reported that average daily trading volume rose 15 percent last month, compared to May of 2007. Client assets rose 6 percent to $1.47 trillion in May from $1.39 trillion last May. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on SCHW.
After hitting a one-year low of $17.41 in August, the stock hit a one-year high of $25.72 in December. SCHW opened this morning at $21.65. So far today the stock has hit a low of $21.42 and a high of $22.11. As of 1:20, SCHW is trading at $21.99, up 64 cents (3.0%). The chart for SCHW looks bullish and deteriorating slightly, while S&P gives the stock a bullish 4 Stars (out of 5) Buy rating.
For a bullish hedged play on this stock, I would consider a September bull-put credit spread below the $17.50 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 9.9% return in just three months as long as SCHW is above $17.50 at September expiration. Schwab would have to fall by more than 20% before we would start to lose money. Learn more about this type of trade here.
SCHW hasn't been below $17.40 at all in the past year and has shown support around $21 recently. This trade could be risky if the company's earnings (due out in late July) disappoint, but even if that happens, that position could be protected by support the stock might find just above $18, where it bottomed out in the March and April. Brent Archer is an options analyst and writer at Investors Observer.
DISCLOSURE: Mr. Archer owns and/or controls diversified portfolios of long and short stock and option positions that may include holdings in companies he writes about. At publication time, Brent neither owns nor controls positions in SCHW.
TD Ameritrade Holding Corporation (NASDAQ: AMTD) reported earnings for its second fiscal quarter yesterday, and they were pretty decent for the most part -- some might have thought that investors were completely shunning the market because of all the volatility going on, but TD Ameritrade's results show that a broker can still make money in such a challenging climate.
Even so, overall revenues declined 3% to $623 million. While transaction-based revenues also declined, it should be noted that average client trades per day did increase 23% to 312,000. That's an important measure when talking about brokers such as TD Ameritrade, or competitors such as E TRADE Financial Corporation (NASDAQ: ETFC) and The Charles Schwab Corporation (NASDAQ: SCHW). Earnings per share really shined, rising 35% to $0.31 per diluted share.
TD Ameritrade is sticking to its earnings guidance of a "midpoint forecast of $1.32." Of course, I'd like to see raised guidance, but a reaffirmation is certainly better than a reduction in guidance. Besides, I have to go back to the challenging climate concern -- if TD is happy to keep the forecast right now, then this is definitely positive. Investors would probably do well to at least investigate the brokers. When the economy snaps back, they should rally higher from these levels. TD Ameritrade, while not right up against a 52-week high, actually isn't that far from it, interestingly enough.
Disclosure: I don't own shares in any of the companies mentioned here; positions can change at any time.
U.S. futures are up this morning, buoyed by upbeat news from technology bellwether Intel (NASDAQ: INTC). After the close Tuesday, the world's largest semiconductor company announced higher-than-expected first-quarter revenue of $9.7 billion, up 9% from a year ago. Intel Chief Financial Officer Stacy Smith said the company saw sales increase in all geographic regions, including the United States and Europe.
This morning, JPMorgan Chase & Co (NYSE: JPM) also reported better-than-expected figures. The third largest U.S. bank said Q1 profit fell to $2.37 billion, or 68 cents per share, from $4.79 billion, or $1.34 per share, a year ago. Analysts had expected 64 cents per share.
Stocks closed slightly higher yesterday after a day of mixed economic data and earnings, including the best quarter ever from Schwab (NASDAQ: SCHW), better-than expected-earnings from Johnson & Johnson (NYSE: JNJ), but losses of more than $1 billion from Washington Mutual Inc. (NYSE: WM).The Dow industrials rose 60 points, or 0.49%, the Nasdaq Composite was up 10 points, or 0.45%, and the S&P 500 gained 6 points, or 0.46%.
After the close yesterday, transportation company CSX Corp. (NYSE: CSX) reported soaring first-quarter profit, with a 63% improvement in earnings per share over last year.
Economic data today includes: March consumer price index and housing starts at 8:30 a.m. EST; crude inventories for the week of April 12 are due in at 10:30 a.m.; and the Fed's Beige Book will be released at 2:00 p.m.
In addition to JP Morgan Chase, earnings are due in today from Coca-Cola, Wells Fargo and, after the close, eBay and IBM.
Charles Schwab Corp. (NASDAQ: SCHW) shares are trading higher after the company reported a first-quarter profit of $305 million, or 26 cents per share, in line with analysts' estimates. SCHW benefited from 246,000 new brokerage accounts during the quarter, 27 percent higher than the year-ago period. If you think that the stock won't fall by too much in the coming months, then now could be a good time to look at a bullish hedged trade on SCHW.
After hitting a one-year low of $17.41 in August, the stock hit a one-year high of $25.72 in December. SCHW opened this morning at $18.73. So far today the stock has hit a low of $18.72 and a high of $19.46. As of 1:45, SCHW is trading at $19.49, up $1.19 (6.5%). The chart for SCHW looks bullish but improving, while S&P gives the stock a positive 4 STARS (out of 5) buy rating.
For a bullish hedged play on this stock, I would consider a September bull-put credit spread below the $15 range. A bull-put credit spread is an options position that combines the purchase and sale of put options to hedge risk in case the stock doesn't do what you think but still leverage nice returns. For this particular trade, we will make a 16.3% return in just five months as long as SCHW is above $15 at September expiration. Schwab would have to fall by more than 22% before we would start to lose money. Learn more about this type of trade here.
Investors will want to read the brief interview with Charles Schwab Corporation (NASDAQ: SCHW) CFO Joseph Martinetto in the March issue of CFO Magazine. Thanks in large measure to Joseph Martinetto and his predecessor, Schwab has not been battered much by the subprime mortgage mess. Despite being chided in The Wall Street Journal (subscription required) and other financial newspapers, Schwab passed on investing in subprime products. It is refreshing to read about a CFO who states up front that subprime products do not meet the risk/return profile Schwab needs in order to act on behalf of their clients, therefore Schwab has no intention of investing regardless of public mockery. Who's laughing now?
For FY 2007, Schwab stock price is up 32%, income from continuing operations in up 26%, and total client assets under management are up 17% to $1.4 trillion. A measurable chunk of those increases comes from new client business from investors burned by other financial services companies that seem to have forgotten how to price risk appropriately. Martinetto states that Schwab processes about $1 billion in securitites transactions daily, so there is enough operating risk in the business without seeking out additional financial risk. According to Martinetto, the US economy is in for another 4-6 quarters of uncertainty due to the fallout from the housing market slump and credit crunch. Schwab stock currently trades under $19 and may provide a suitable investment for more conservative investors seeking a measure of stability.
When E*Trade Financial Corp. (Nasdaq: ETFC) had its meltdown, I considered buying but I was too chicken. I mean, can you really blame me? When it got caught up in the financial crisis, the term "falling knife" never felt so accurate. A 52-week range between $2.08 and $25.79 is a pretty scary thing; to see what I mean in graphic format, feast your eyes on the chart.
Lately, though, I've been warming up to the idea ever so slightly of taking a shot on E*Trade. I can't say I possess strong conviction yet, but I'm not necessarily afraid of owning financial stocks. In fact, as an example, I own Newcastle Investment (NYSE: NCT), an idea that Sheldon Liber talked about recently, one that has a pretty frightening yield. E*Trade is a significant name in the online-brokerage industry, and its brand is valuable. When I saw the company falling off a cliff last year, my instinct to buy started to kick in, insisting that it isn't going to go the way of the dodo. Plus, takeover theories began, further fueling my fascination. In the end, I took no action.
Now, though, the stock has bounced nicely off its lows. And it reported January data yesterday that had a couple of good data points. Daily average revenue trades are up 18.8% for the month-to-month timeframe, and they increased 21.5% year-over-year. End-of-period retail accounts were flat month-to-month, and were up 6.2% year-over-year. Total retail client assets did decrease, however -- year-over-year, they declined over 12%. And, hey, for whatever this is worth, its Super Bowl "Talking Baby" ads apparently were a hit.
At any rate, I'm a bit more sanguine on E*Trade's stock potential. I may not buy just yet, but the closer it gets to $6 or $7 a stub, the better the chance it has, in my mind, of going to double digits again. Sure, Schwab (NASDAQ: SCHW) and TD Ameritrade (NASDAQ: AMTD) are the safer broker bets, but I can't help looking at E*Trade.
Charles Schwab reported that its fourth-quarter profit fell 34% from the same period a year ago, in part due to the sale of its former U.S. Trust wealth management unit. The company earned $308 million, or 26 cents per share, down from $467 million, or 37 cents per share, a year ago. Revenue rose 23% to $1.35 billion from $1.1 billion a year ago. The consensus forecast of analysts surveyed by Thomson Financial had been earnings for the quarter of 27 cents per share on revenue of $1.32 billion. Shares fell in early trading Wednesday but closed up 1.56% to $22.81.
Wells Fargo said that it earned $1.36 billion, or 41 cents per share, for the fourth quarter, its lowest quarterly profit in years. That was 38% below net income of $2.18 billion, or 64 cents per share, in the same period of 2006. The results were in line with earnings estimates of analysts, who had already factored in charges and loan loss reserves that Wells Fargo announced in November. The company's revenue grew 8% in the fourth quarter to $10.21 billion from $9.41 billion a year ago. Shares rose 3.51% Wednesday to close at $27.42.
AMR posted a loss of $69 million, or 28 cents per share, for the fourth quarter, due to rising fuel prices and weather disruptions. The company had a profit of $17 million, or 7 cents per share, during the same period a year ago. Analysts polled by Thomson Financial had expected the carrier to lose 75 cents per share, but that did not include one-time gains from the sale of communications and engineering firm ARINC. Revenue crept higher during the quarter to $5.68 billion, from $5.4 billion a year ago, which was in line with analysts' expectations. Shares rose 3.03% Wednesday to $13.60.
A look at the Nasdaq short interest on December 14, compared to November 30, shows that bets against discount brokers rose sharply. Short interest in E*Trade (NASDAQ: ETFC): moved up 3.9 million shares to 53.7 million, according to data from the exchange. That might have been expected, given the financial company's problems with mortgage related securities.
But, shares short in TD Ameritrade (NASDAQ: AMTD) jumped 8.2 million shares to 17.8 million, and short interest in Schwab (NASDAQ: SCHW) moved up by 6.1 million shares to 28.7 million. Both figures are a fairly large percentage increase.
The simple explanation for the rise may be that both stocks have done better than financial shares as a whole and are ready for a pull-back. Schwab's stock is up over 30% this year. Ameritrade is up just under 25%.
But there are two other possible explanations, both a bit more unsettling. One is that a bear market would likely hurt earnings at discount brokers. A recession early next year could cause individual investors to pull in their horns. The other theory is that the two firms could have balance sheet problems of their own. This is less likely, since neither company has made any disclosures to that effect.
Whatever the reason, a fairly large amount of money is being gambled that the discount brokerage stocks have peaked.
Douglas A. McIntyre is an editor at 247wallst.com.
I've been writing about finance for longer than I care to admit (okay, 15 years, which feels like a long time, even if Floyd Norris might scoff). But one of the most surprising news flashes of my career has to be when I read in mid-November this year that E*Trade was tanking on concerns the company could go bankrupt.
E*Trade (NASDAQ: ETFC)? Bankrupt? I've seen discount brokerages come and go, but E*Trade has long been one of the survivors. It was up there, knocking on king Schwab's (SCHW) door, leaving competitor TD Ameritrade (AMTD) snapping at it heels. Or so I thought.
But it turns out that was the way things were before the mortgage market went bust. And before CEO Mitch Caplan decided to place a big bet on residential mortgages. Caplan, formerly head of a bank that E*Trade acquired, became CEO in 2002.
It's not easy to top a present like TheStreet.com, Inc. (Nasdaq: TSCM), but my next holiday stock pick does just that. I give you investor education cum brokerage firm INVESTools Inc. (Nasdaq: SWIM). It's a pretty cool business model that aims to teach people to invest via seminars, getting some juicy upfront fees and reaping the rewards over time through commissions and fees, if they are successful in their teachings.
Besides having a booming stock – which, after a nasty 50% mid-year drop, this week is breaking out to new all-time highs – an incredible trading platform that I use for my own trading and big time investors known for discovering undervalued smallcap stocks, this company has some serious growth. In fact, you'd be hard pressed to find another company in the finance arena with numbers that are even in the same ballpark.
CNBC is reporting that Schwab (NASDAQ: SCHW) and TD Ameritrade (NASDAQ: AMTD) may be in talks to buy troubled discount broker E*Trade (NASDAQ: ETFC). The news has pushed up E*Trade shares as much as 23% to $5.25.
The problem is that if the broker's mortgage securities investments are as severe a problem as some analysts think, the company may not be worth more than the $3.46 where the stock traded a few days ago. Those buying into the rally could be burned if an offer is well below the current price.
Any deal would probably be based on selling the customers of the discount brokerage unit and keeping the damaged securities on the balance sheet within the remaining public company. There is no guarantee that the cash paid for the customer base would not be eaten up if the market for these distressed securities drops further.
E*Trade may be worth over $5, but it could also be worth a lot less.
Douglas A. McIntyre is an editor at 247wallst.com.
A look at 52-week highs often shows where the market is pointing for its leadership when it moves up, or safety when it sells off. A few notable companies that hit highs last week:
Priceline.com (NASDAQ: PCLN): Shares in the online travel company have almost tripled from their one-year low and now trade just shy of $110. Given the carnage in the airline industry, this may seem odd. But being an online middle man is very different from having to fuel the planes and maintain the hotels. The company's gross travel booking rose 54% in the third quarter, pushed by strength in its Europe business. Total revenue rose from $313 million in the quarter last year to $417 million this year. E-commerce can be a pretty good business, even if the industries the company serves are not doing well.
Charles Schwab Corp. (NASDAQ: SCHW): Financial services looks like a train wreck of an industry. But, with retail trading running strong, full-service and discount brokers are doing well, as long as they don't have assets in the mortgage-backed securities area. Schwab seems smart enough to have dodged that bullet. It hit a 52-week high of over $24 this last week. Daily trades by clients hit almost 319,000 in October, up 29% from the same month last year.
This post is part of my series featuring established companies and the smaller, more aggressive or innovative rivals that may eventually succeed them. 
Here are some highlights from this past week's 
U.S. futures are up this morning, buoyed by upbeat news from technology bellwether 
When 
I've been writing about finance for longer than I care to admit (okay, 15 years, which feels like a long time, even if Floyd Norris might scoff). But one of the most surprising news flashes of my career has to be when I read in mid-November this year that E*Trade was tanking on 
CNBC is reporting that 
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