E*Trade - A Forgotten Profit Center?

It makes sense that E*Trade Financial (ETFC) has taken it on the chin over the past year and a half. And rightly so, its mortgage division has a large portion of problematic loans on the books even now.

The next two quarters will show us if it can engineer a soft landing from the fallout of their bad mortgage debt. But the mortgage “mark of Cain” shouldn’t be reason alone to exclude it from our short list of investment opportunities.

In the same way investors punished Altria Group (MO) for its cigarettes and tobacco while ignoring the profitable aspects of the spun off Kraft Foods (KFT) division, Wall Street seems to have forgotten that E*Trade has an enormously profitable brokerage business.

No doubt there are challenges there - but these are market issues, not enterprise problems.

E*Trade’s customer trading activity was down from last year, but higher than the previous month’s figures. It’s not rocket science that E*Trade only makes money when investors and traders make transactions. And with the poor market performance, its no wonder their receipts are down.

But a few trading days with massive volume could be all it takes to bring the good times back to E*Trades bottom line.

One of the really interesting things about this company’s situation is the amount of short interest in ETFC. Almost 74 million shares have been shorted. That’s almost 13% of the total shares outstanding. We pay close attention to large amounts of short interest because it tells us there are lots of investors speculating in one direction. If they turn out to be wrong, it drives the price up even faster.

If the market’s volume keeps picking up, and E*Trade can manage their mortgage losses, look for some big up days for E*Trade as shorts rush to cover.

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