Breaking Down a Stock...

One of my major investment currently is the holding of Etrade Ticker Symbol (ETFC). Let begin breaking down this stock with a history background. In June of 07 the stock was trading between 24-25 dollars a share. From July to November due to the mortgage crisis and write down on it portfolio the stock decline to 9 dollars a share. On November 12, after analyst from Citigroup's Prashant Bhatia report rumors that there a possibility of E-trade going bankrupt. This led the stock to decline to 4 dollars and as low as 2 dollars a share. Now it currently trading at 4 dollars a share. That is basically a historical price and background. Breaking down it company E-trade, consist of online trading brokerage, banking, and Investing. It core business is it strong standing platform in the Online trading brokerage. Banking and Investing portfolio was very messy upon the mortgage crisis. This is the basic of investing getting to know a company by checking any financial web site such as GOOGLE FINANCE, Yahoo finance , MSN money ect ...
Now is doing the homework why should I invest in this stock. Breaking down it numbers and earning. This is a lot work it take dedication. I recommend you read the book MAGIC NUMBERS for Stock Investor by Peter Temple(how to calculate the 25 key ratios for Investing success). This book basically teach you how to read numbers in earning report and stock prices. I don't want to confuse people reading this blog by throwing number at them that they don't understand. I'm not going to try to explain them either because it too long for a blog. But I'll give you some info on what you trying to look for. Most important thing is Value! Like in my previous post I keep stressing about stock price being under value and over value. ETFC is way under value if you breaking down the numbers. P/E ( stock price divided by earning per share) this is very simple I think you all should know this. This allow us to compare the company with it competitor. For example TD Ameritrade stock price as of Friday closing is $17.32 and it earning is $1.30 so 17.32 divided by $1.30 you get P/E 13.26. Now compare that with ETRADE trading at 4 dollars a share and it earning. Now of course you cannot use the current earning because it still saving money to clear it Balance sheet . But you could estimate it future earning, which is around 80 cent . Which is reasonable for ETFC to obtain once it reserve for the write down is complete. So $4 over .80 cent is about P/E 5. What does P/E number mean? you paying $5 to earn 1 dollars for E trade and you paying $13.26 dollars to earn 1 dollar for AMTD. You don't really get the earning unless the company decided to pay dividend back to you. But that is what P/E technically mean. There are a lot more number similar to this that help compare the value of stock in the Book Magic Numbers I mentioned above. The number are easy to calculate it nothing special as long as you understand the reason and what it's trying to compare. Try to look for company that have Positive earning, low PE compare to it competitor( what I mean is not to compare a tech company like Apple with a financial company like Goldman Sach, try to compare it to IBM , HP instead ect...) and look for reason why the earning should increase. After doing the homework on those number now figure out why the stock price of this company is going up. 3 Things that pushes stocks price up or move it pass it daily trading price range, Earning Growth, M&A( Merger and Acquisition), and New production. Obviously a number that in the negative will have a huge earning growth potential Currently E-Trade in negative .20 Cent per share, why well because It reserving money for potentially losses in it HELOC portfolio. So technically speaking the company is not losing money it just reserving money incase the portfolio go bad. Once the saving is complete the number will go back to positive earning. Or when the market have a reversal then those Reserved money is consider and increase in earning growth. Of course that is not guarantee so we just have to set aside and just look at what it is for what it is. Look at it revenue in it brokerage business and determine the earning number once it done saving. Remember you want to be safest possible when you investing so you trying to put a low number(high cap on expenses). After all the calculating I found that there is no reason E-trade can't post a earning of 20cent a share each quarter. Now look at it M&A potential, At the current condition it is very likely anyone would buy a company. Potential buyer are Charles Schwab and TD Ameritrade, both of those company CEO had in the past said that it would love to acquire E-Trade it a right price. Potentially I wouldn't put a lot thought in this because, They had their chances when E-trade needed it cash infusion in November and December. If they didn't capitalize at that time, I doubt they would now when it more stable and the price probably is a lot more now. Could someone else with a lot money like Warren Buffett company Berkshire Hathaway put a bid for it? Of course, but that percentage is very low. Now let look into new production, this is a lot trickier to break down since it is a financial company. Financial company don't really have a product like apple I phone . Instead it provide services , funding , and investment. In any cases, I don't see any services , funding, or investment ideas due to current situation. Everyone is just trying to save up at the current condition and protect it capital. The result of my analyzing is I put a target price of $10 dollars on E-trade. Which is pretty good consider it only cost $4 dollars a share. That more then double your money. Why? It earning growth will jump from -20 cent to 20 Cent, Cost on the stock market of one of it competitor TD ameritrade is .31 cent earning and it price is around 17 dollars a share. I disregard it M& A potential and New production, because both are very slim and unlikely for the period of a couple year. That is how I pick a stock to invest in.

Readers(Author is holding ETFC, Advise a buy rating on ETFC. I would like to say I'm not a professional investor or money manager, so Buy under your own risk)