Is This Investment Brokerage Unstoppable?

Dan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

TD Ameritrade (NYSE: AMTD) chairman, Joe Moglia, recently stated on CNBC that the market suffered a correction. Translation: it’s nothing to worry about. In his opinion, the pullback related to a spectacular run, not underlying fundamentals. Moglia also thinks that Ben Bernake’s announcement of backing off his $85-billion bond-buying program later in the year is a positive, because it indicates the economy is gaining strength.

Of course, Moglia is going to put a positive slant on every economic development. If Bernake announced that he would add to his bond-buying program later in the year, then Moglia arguably would have stated it was a positive because it would help equities.

Many investors believe that TD Ameritrade performs best when stock market volatility reigns supreme. While that might be the case in the short term, it’s important to note that increased volatility often indicates a trend change. In the current environment, this would lead to a trend downward, which would be a negative for TD Ameritrade.

Improved performance

The following is a well-known saying on Wall Street:  “The market can stay irrational longer than you can stay solvent.” In other words, your logic might make sense, but you could lose anyway because external forces are altering the natural direction of the market.

The point here is that fundamentals should lead to a steep downward movement in the stock market, but every time downward momentum begins to build, the Federal Reserve (or other central banks around the world) step into the fray with an action or comment and prop the markets back up. This is good news for TD Ameritrade and its investors, because retail investors make more trades when the market is doing well.

TD Ameritrade might perform best when volatility is high, but it really wants the market to stay high for optimal long-term results. In May -- prior to the recent market swoon -- trading at TD Ameritrade increased 9% versus April and 13% year-over-year. Also in May, total client assets improved 19% compared to April and 23% year-over-year. If total client assets are moving higher, it indicates that traders are performing well, which relates to the steady ascent of the market prior to June. 

TD Ameritrade's revenue increased over the last three quarters but declined in 2012. You also have to figure that most retail investors and traders don’t hedge. If their stock drops, they’re simply going to watch it drop and hope for the best. Inaction doesn’t help TD Ameritrade. When the market is rising, those same traders will look to move some of their capital to another stock that they think presents a better opportunity.

If you ever want a clue for future performance, go to Alexa.com and study the website’s recent traffic trends. Over the past month, pageviews-per-user have declined more than 2%, and time-on-site has declined 1%. These aren’t big moves, but they’re not positives, either. And they could indicate that June's performance will be sub-par. 

TD Ameritrade vs. peers

TD Ameritrade caters to retail traders as well as Registered Investment Advisors. Its trading platforms include web platform (alerts, screeners, customizable workspace), trade architect (streaming news and opportunity identification), thinkorswim (in-depth analytical resources), and mobile (streaming market commentary on mobile devices). As stated above, revenue declined in 2012, but the recent performance has been strong.

Charles Schwab (NYSE: SCHW) offers trading and financial services for individual and institutional clients. Revenue has increased for three consecutive years.

Both TD Ameritrade and Charles Schwab have demonstrated quality debt management, sporting debt-to-equity ratios of 0.3 and 0.2, respectively. E*Trade (NASDAQ: ETFC), a brokerage products and services provider, owns a debt-to-equity ratio of 1.6.

Companies with quality debt management and strong cash positions have an advantage if a bear market presents itself. These companies have the ability to increase their dividends or offer share buybacks in order to attract more investor interest. Companies like E*Trade don’t have such a luxury as it will be busy paying down debt.

Even if debt doesn’t concern you, E*Trade’s revenue has now declined four years in a row, and it has only delivered a profit in one of the past five years. On the other hand, a couple of insiders have been buying E*Trade shares -- and making money.

Conclusion

E*Trade has performed poorly during one of the biggest bull runs in history, debt is a burden, and there is no dividend yield. However, insider buying is a positive sign. Overall, E*Trade should only be considered as a highly speculative play.

If you’re looking for the best upside potential out of the three aforementioned companies, then it would be TD Ameritrade, but that’s only if the broader market performs well. If you’re looking for steady gains as well as the most resiliency in bear markets, then consider Charles Schwab. With $34 billion in cash, many options are available for returning more capital to shareholders if necessary. It should also be noted that TD Ameritrade currently yields 1.5%, and Charles Schwab yields 1.2%.

Back in December, the Fool's chief investment officer picked his No. 1 stock for the year, and it gave investors who took advantage of the opportunity gains of more than 30% during the first four months of 2013. To learn more about the stock and to find out just how much further it could rise, be sure to check out our exclusive report, "The Motley Fool's Top Stock for 2013." Click on the link to get your free copy today!


Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends TD Ameritrade. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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