Discount broker shares mostly rise on analyst note

Discount broker shares mostly rise on analyst's bullish outlook, but E-Trade dips

• On 3:28 pm EDT, Tuesday September 22, 2009

BOSTON (AP) -- Discount brokers shares mostly rose on Tuesday, with E-Trade Financial Corp. the exception after an analyst offered a mostly bullish outlook on the sector but said a recent rise in E-Trade's shares may have been overdone.

BMO Capital Markets analyst Michael Vinciquerra said in a research note that he doesn't share other investors' optimism about E-Trade shares because he believes any potential merger involving the company is a long way's off.

While calling E-Trade "an attractive merger candidate," Vinciquerra said he doesn't see potential buyers becoming interested "until the credit outlook has improved considerably. That's several quarters away yet, in our view."

ETrade shares have become "rich, if not overvalued," he said, after rising about 33 percent this month. He believes that the jump in its share price has been driven by E-Trade's recent moves to improve its capital position through a share offering and debt swap.

Vinciquerra said two rivals, Charles Schwab Corp. and TD Ameritrade Corp., won't consider buying E-Trade "until its mortgage book has shown significant and lasting improvement, and that's unlikely to be until at least midway through 2010 if not later."

"Buying on a takeover possibility might be a good idea 10-12 months from now, but we think it's foolhardy in the near term," he said.

Shares of E-Trade fell 6 cents, or 3 percent, to $1.93 in afternoon trading.

Other discount brokers were trading modestly higher, with Charles Schwab up 61 cents, or 3.4 percent, to $18.65; TD Ameritrade rose 39 cents, or 2 percent to $19.87; TradeStation Group gained 76 cents, or about nearly 10 percent, to $8.45; and optionsXpress Holdings Inc. rose 61 cents, or 3.4 percent to $18.55.

Vinciquerra has an "Outperform" rating on the discount brokerage sector, and did not change any ratings of specific shares on Tuesday -- including "Outperform" ratings for Charles Schwab and TD Ameritrade, and "Market Perform" for E-Trade, optionsXpress and TradeStation.

Vinciquerra said the sector has benefited from the market rally that started in March, restoring investor confidence after the plunge last fall and winter.

"Overall, the general story among the discount brokers has been one of strong client activity, greatly reduced interest income, and collapse and subsequent rebound in client asset levels," he said. "Despite the strong trading activity, client holdings of cash have remained well above historical percentages, indicating that risk aversion is still a key among most clients."

"Each of the public discount brokers has been adding accounts for the last few quarters, with the strongest growth being generated by TD Ameritrade," he wrote. "The same can be said in terms of client assets, as rebounding equity markets have boosted asset levels, and net new flows have remained positive in most months."

He said Charles Schwab' business has remained "very healthy" overall, and he considers it "still the best overall company in this space."

As for TD Ameritrade, Vinciquerra said the company's client trading "has remained consistent and fairly robust over the last 12 months."

Buzz up!