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VIDEOTicker Shock: Three Reasons Not to Trade E*Trade
Wednesday's top stories and stocks with potential to move.
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The Hang Seng closed up 2.76%, however the Nikkei was closed on holiday. Meanwhile, European stocks were in the green earlier this morning. And here in the US, we're currently trading higher.
E-Trade (ETFC):
The one-time high-flying online brokerage firm was out with its first-quarter numbers last night after the bell. The New York-based company turned in a loss of $0.41, which was a penny worse than expectations.
Not great. In any case, I’m guessing there’s going to be a bunch of chatter about the following paragraph, which was also in the first-quarter release (Note that Mr. Layton is the CEO):
" 'Given the uncertainties of the current environment, we believe that it is necessary to further improve the Company’s capital position,' said Mr. Layton. 'We have been increasing our efforts to reduce the size of the Bank’s balance sheet and the associated risk, to deleverage the Parent company’s capital structure, and also to generate additional capital to inject into the Bank.' The Company noted that such efforts would involve public market issuance and/or private investors and would create significant dilution to current shareholders; deleveraging of the Parent would also substantially reduce its interest expense.”
I obviously don’t see these comments as good news, and I plan on steering as clear of the shares as I do of the swine flu.
Of course, there are a few other reasons beyond dilution to stay away from the shares:
1. Keep in mind, the stock trades south of $5, which could keep some institutions and brokers out of the game.
2. Let’s not forget about the sea of red ink it’s expected to be swimming in this year and next.
3. There are better opportunities out there: I'd rather but some coin down on Bank of America (BAC).
4. How do you think the analysts who still cover the stock are going to react? We could see some not-to-favorable research hitting the Street in the days ahead. Note that this morning, FBR Capital reportedly lowered its rating from "Market Perform" to "Underperform."
Sun Microsystems (JAVA):
You think Oracle (ORCL) saved its receipt? JAVA was out with its third-quarter numbers last night.
Per the Associated Press:
“Stripping out one-time charges, including $46 million for a restructuring that has cost thousands of workers their jobs, the latest quarter's loss amounted to $0.07 per share. Analysts were expecting a loss of $0.19 per share, but the numbers don't directly compare because Sun subtracted out charges that analysts didn't. When both sides use the same metric, Sun says its loss was $0.05 per share wider than estimates.”
Whatever the case, its revenue line came in a smidge north of $2.6 billion. And that was south of the $2.86 billion the Street had been looking for. I’m also noticing that its gross margin slipped more than 2 points from the comparable period last year. Not the end of the world, but thought I’d point it out.
A couple of things: 1. If I were long the shares at $9.15, I’d probably bail at this point. The reason: The results certainly weren’t stellar, and why wait to hopefully collect $9.50 a pop sometime this summer when Oracle is expected to seal the deal? Remember: Something could still go wrong, and a 3.8% return (from $9.15 to $9.50) doesn't seem worth the risk. I'd rather deploy the dough elsewhere.
2. If, however, the stock were to trade down to, say, $8.75, I’d consider getting back in - assuming no shoes drop (or look like they might). The potential for a roughly 8.6% return sounds a bit more intriguing.
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