As brokers move to eliminate trading fees, investors should buy E*Trade Financial stock and be wary of TD Ameritrade, an analyst wrote Monday.
E*Trade stock (ticker: ETFC) was recently up 1.8% to $37.06, while TD Ameritrade (AMTD) was up 0.46% to $33.86. UBS analyst Brennan Hawken on Sunday upgraded shares of E*Trade to Buy from Neutral while cutting his price target on the shares by $4 to $41, $3 below FactSet’s average.
The change comes as many brokers are eliminating trading fees, a subject Barron’s explored in a cover story this week.
“The rapid-fire cuts caught investors and analysts by surprise, sending the stocks reeling as it became apparent that commissions would be going the way of ticker tape,” we wrote. “While customers of the firms may be delighted, analysts slashed their estimates and tried to figure out who the winners and losers would be once the dust settles.”
Hawken figures it’s good news for E*Trade, even as the fee cuts indicate that long-term earnings targets may need to be scaled back.
“The stock is trading at a wider discount to peers than its five-year average, despite the fact that the difference between firms’ earnings mix in the industry is converging,” he wrote. E*Trade “offers the most compelling path to value creation among the discount brokers.”
But he thinks TD Ameritrade looks less attractive, and he cut his rating on the shares to Neutral from Buy while cutting his price target from $40 to $33, below FactSet’s $41 average, in part because the company, whose current CEO is on his way out, hasn’t named someone to replace him.
“The earnings hit from price cuts has been reflected in TD Ameritrade shares,” Hawken wrote, but we believe multiple recovery and expansion is very unlikely in the near-term given the value-destructive nature of the pricing actions.”
Shares of E*Trade and TD Ameritrade, along with Charles Schwab (SCHW), have all fallen this month as investors worried about the effects of disappearing commissions. All three are down for the year, while the S&P 500 is up.
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