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E*TRADE Rallies 10.5% Quarter to Date: What's Driving It?

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During the Q1 earnings season, financial stocks put up a decent show. Notably, one such investment bank — E*TRADE Financial Corporation (ETFC - Free Report) — has rallied 10.5% quarter to date, significantly outperforming the industry’s decline of nearly 6%.

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 of the company’s ongoing initiatives bode well for E*TRADE.

This apart, E*TRADE is part of the industry, which has a Zacks Industry Rank #64 (top 25%).



Moreover, the stock seems undervalued on the basis of its PEG and price-to-book (P/B) ratios. E*TRADE has a PEG ratio of 1.03 compared with the S&P 500 average of 1.77. Also, the company’s P/B ratio of 2.67 is below the S&P 500 average of 3.17.

Additionally, estimates for this Zacks Rank #3 (Hold) stock have been on an upswing. Over the last 60 days, the Zacks Consensus Estimate has moved up slightly for 2018 and 1.2% for 2019.

Fundamentally, E*TRADE’s earnings have jumped 30.32% annually over the last three to five years. The earnings growth momentum is anticipated to continue in the near term as well. The company’s projected EPS (earnings per share) growth (F1/F0) is 66.21% for 2018 and (F2/F1) around 12.24% for 2019.

In the last three years (2015-2017), the company has recorded a benefit to provision for loan losses, with the trend continuing into first-quarter 2018 as well. We believe this benefit is driven by the company’s efforts to shrink its balance sheet.

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, the rate hikes will enable these firms to invest at higher rates. As E*TRADE currently derives nearly 60% of its total net 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 daily average revenue trades and also set managed account assets under management 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.
 

Stocks to Consider

A few better-ranked stocks in the same space include LPL Financial Holdings Inc. (LPLA - Free Report) , Evercore Inc (EVR - Free Report) and Stifel Financial Corporation (SF - Free Report) . LPL Financial and Evercore carry a Zacks Rank #1 (Strong Buy), while Stifel Financial holds a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

LPL Financial’s earnings estimates have been revised around 22.4% upward for 2018, in the past 60 days. Also, its share price has rallied 14.1% in six months’ time.

Evercore’s earnings estimates for 2018 have been revised 2.7% upward, over the last 60 days. Further, in the past six months, the company’s shares have jumped 18.5%.

Stifel Financial witnessed 1% upward earnings estimates revision for the current year, in the past two months. Moreover, over the past year, its shares have gained 16.4%.

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