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E*TRADE Rallies 14.2% Quarter to Date: Is More Upside Left?

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Improving operating backdrop, rising rate environment, expectations of lesser regulations, lower tax rates and strengthening domestic economy have driven investors’ optimism on banking stocks. Therefore, some of these stocks are profitable picks, due to strong fundamentals and solid long-term prospects.

One such investment bank — E*TRADE Financial Corporation (ETFC - Free Report) — has rallied 14.2% quarter to date, significantly outperforming the industry’s gain of 11.1%.

This price performance is backed by the gradually improving operating environment and rate hike scenario which is beneficial for brokerage business. Furthermore, anticipated improvement in trading activities and several ongoing initiatives will bode well for E*TRADE. Notably, the bank has recorded upswing in Daily Average Revenue Trades (DARTs) in the first two months of the current quarter.

Apart from this, E*TRADE is part of the industry, which has a Zacks Industry Rank #81 (top 31%).

Moreover, the stock seems undervalued on the basis of its Price-to-Book (P/B) ratio. E*TRADE has a P/B ratio of 2.16 compared with the S&P 500 average of 3.27.

Additionally, the movement in earnings estimates for this Zacks Rank #2 (Buy) stock have been decent. Over the last 60 days, the Zacks Consensus Estimate has remained unchanged at $2.26 for 2017 and moved up 1.2% for 2018.

Fundamentally, E*TRADE’s earnings have surged 29.56% annually over the last three to five years. This impressive earnings growth momentum is anticipated to continue in the near term as well. The company’s projected EPS (earnings per share) growth is 22.16% for 2017 and 14.79% for 2018.

Further, with a rise in rates, brokerage firms are likely to engage in more investment activities. As brokerage firms earn interest income on un-invested cash in customer accounts, this rate hike will enable these firms to invest at higher rates. As E*TRADE currently derives nearly 60% of its total revenues from net interest income, the company is poised to benefit from the recent rate hikes.

Additionally, E*TRADE is focused on derivatives mix with a target of increasing it to 35% of DARTs and also set managed account assets under management (AUM) target of $6 billion within the next two years. The company aims to achieve 2-3% improvement in its rate of annual organic growth, across accounts, assets and trades.

E*TRADE did not repurchase shares during the second half of 2016, due to the OptionsHouse acquisition. However, following the acquisition, management resumed share repurchases in third-quarter 2017, with buyback of 4.6 million shares at an average price of $40.64. We believe, as the company strengthens its overall performance, it may gradually enhance shareholders’ value with a dividend payment as well.

Other Stocks to Consider

Federated Investors, Inc. (FII - Free Report) has been witnessing upward estimate revisions for the past 60 days. In six months’ time, the company’s share price has been up more than 30%. It flaunts a Zacks Rank of 1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Enterprise Financial Services Corporation (EFSC - Free Report) has been witnessing upward estimate revisions for the last two months. Additionally, the stock moved up more than 10% over the past six months. It currently carries a Zacks Rank of 2.

Artisan Partners Asset Management Inc. (APAM - Free Report) has been witnessing upward estimate revisions for the past month. Also, the company’s shares have risen nearly 35% in six months’ time. It also holds a Zacks Rank of 2, at present.

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