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On Nov 13, 2013, we upgraded our long-term recommendation on E*TRADE Financial Corporation (ETFC - Analyst Report) to Outperform from Neutral based on strong third-quarter 2013 earnings. Decrease in expenses reflects the company’s successful cost reduction initiatives. Further, E*TRADE’s decision to focus on core operations and exit the market making business is expected to improve profitability.

Why Outperform?

Though earnings per share of 16 cents were in line with the Zacks Consensus Estimate, it improved significantly from the net loss of 10 cents reported in the prior-year quarter. A rise in total daily average revenue trades (DARTs) and prudent expense management were the positives for the quarter. Moreover, decrease in provisions and a strong capital position were the tailwinds. However, reduced revenues remain a matter of concern.

Though volatility in equity markets has affected the level of DARTs over the past few years, the recent rebound in equity markets has been favorable for the company. Notably, DARTs for the nine months ended Sep 30, 2013 nudged up 5% year over year to 147,777. Moreover, the company’s aggressive focus on loss mitigation strategies such as short sales, loan modifications and transfers to better servicers are expected to enhance DARTs in the coming months.

We also commend the company’s efforts to ease its balance sheet risk by reducing credit risk in its loan portfolios. Further, cost reduction initiatives undertaken by the company are expected to be profitable in the future.

Following impressive third-quarter 2013 results, the Zacks Consensus Estimate over the last 30 days for 2013 increased 6.3% to 68 cents. For 2014, the Zacks Consensus Estimate rose 7.7% to 84 cents per share, over the same time frame. Currently, E*TRADE carries a Zacks Rank #3 (Hold).

Other Stocks to Consider

Some better-performing stocks in the same sector include Ladenburg Thalmann Financial Services Inc. (LTS - Snapshot Report) with a Zacks Rank #1 (Strong Buy), while Evercore Partners Inc. (EVR - Snapshot Report) and Interactive Brokers Group, Inc. (IBKR - Analyst Report) carry a Zacks Rank #2 (Buy).

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