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Online Brokers Beat the Winter Blahs

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

February was an ugly month for most of America. The country spent much of its free time digging its way out of piles of snow and hoping the numerous blizzards would pass, leaving the way for a green spring. But the fertile season came early for wirehouses and investment banks, as they recorded some of their best monthly metrics in quite some time.

The Big Daddy of volume brokerages, Charles Schwab (NYSE: SCHW) just reported its daily average revenue trade (DART) metric for February, and it was nicer than a warm fireplace and a hot drink during a snowstorm – DARTs totaled just over 500,000 for the month. This was a 7% improvement over that of January and 5% higher than in February 2011. In itself, the month-on-month boost was a nice accomplishment, since the first month of the year is a heavy one due to investors trading more actively in the hopes of profiting from the January Effect. Schwab’s February number was its highest since this past October, and its third best showing in the past year.

As Schwab went, so followed the competition. TD Ameritrade’s (NYSE: AMTD) DART number was around 409,000, its highest since this past August. Like Schwab, that figure took the #3 spot on the league table of best results over the past year for the brokerage. It also beat its rival’s month-on-month improvement figure, coming in at 9%, although its February figure represented a 10% drop on a year-over-year basis.

The month-on-month champ, however, was E*Trade (NASDAQ: ETFC), which grew its DARTS an impressive 16% in February. The company didn’t fare so well on an annual basis, though, with that metric dropping 9% from the same month in 2011.

All in all, though, despite a few negative numbers sprinkled among the results, the February DARTs confirm that the discounters have for the most part performed fairly well of late. In spite of a generally tough environment for traders and investment banks over the past year or so, they have managed to keep their margins in the double digits and even, in the case of ETFC, grow them noticeably. TD Ameritrade has been particularly steady and profitable, recording a net margin of 23% in each of its last two quarters despite a slight (2%) revenue slide over that period.

So the timing could be right to open a position in one, several or all of these guys. Their trading volumes are good and revenues and profitability are either being maintained or, at least, not deteriorating significantly as is often the case with some of the full-service, white shoe competition. Morgan Stanley (NYSE: MS), for example, saw revenues lurch downward in its most recent quarter, dropping 43% from the previous period, while net fell underwater to the tune of $250 million. The discounters, since their menu of services are more limited and easier to forecast, are less subject to such wild swings in their financials. Another great advantage they’ve had in recent days is that no one’s writing exposes about how awful it is to work for them, a la Greg Smith at that nasty “vampire squid” Goldman Sachs (NYSE: GS). Nor is any central bank subjecting them to stress tests to gauge their survivability.

Of the three discounters, TD Ameritrade looks the best on a forward P/E and profitability basis (that 23% net margin sure is a nice figure), but the company comes in last in terms of anticipated two-year EPS growth, at only 16%. E*Trade, which seems to be emerging from a long period of struggle, has an expected growth number nearly twice that, at 31%. On the downside it still posts the lowest margins of the three, and in terms of total accounts it’s nearly half the size of AMTD and SCHW. It also is the only one of the troika that doesn’t pay a dividend. Charles Schwab, he of the steadily growing DART numbers, is slightly more expensive than its rivals on a forward P/E basis… but Chuck performs consistently and is financially and operationally solid.

Thankfully, we’re coming into the thaw of the warmer months and we’ll soon put away the snow shovels and heavy jackets. Now's the chance to enjoy the delights of spring and profit from the optimism of the season. The big discount brokerages have a head start, as they’ve already been doing so for a few months now. Maybe it’s time to join the party.

Motley Fool newsletter services recommend TD AMERITRADE Holding, Goldman Sachs Group and Charles Schwab. The Motley Fool has no positions in the stocks mentioned above. Eric Volkman owns shares of TD AMERITRADE Holding. 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.

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