It's all my fault. I've noted before that when I get bullish on E*Trade it goes down. When I said that I was buying (even a tiny bit) yesterday, that should have been everybody's cue to head for the hills. So I shouldn't be cheerleading...

Argh! I just can't help myself!

Take a look at a comparative graph of E*Trade, Ameritrade, and Schwab. See how Schwab been outperforming E*Trade (and Ameritrade) over the last three and six months. Has Schwab really retaken the initiative in the field? To be fair, if you look at the two year graph they've pretty much converged (and Ameritrade leads by a wide margin).

My assumptions:

Two years ago, E*Trade was absurdly undervalued because most investors did not believe that a) E*Trade was really an internet merchant and not just a stock broker, b) E*Trade had any potential to widen its scope to a financial portal rather than a stock broker, c) E*Trade had any competitive or branding power that would give it any advantage over the hundreds of competitors that would be nipping at its heels, d) the aforementioned competitors would not force E*Trade to lower it's commission rates to $4 or $8 per trade, e) that eBusiness has a very high price of entry, particularly if you are late to the game.

As a business, E*Trade has executed better than Schwab over the last two years (and has absolutely trounced Ameritrade).

Over the next several years, E*Trade will continue to execute better than Schwab, but maybe by not quite so wide a margin.

Long term, the market is a weighing machine (I believe that comes from one of the Gardners but it might have been Lynch or Buffet) and short term it is a voting machine (readily seen by the wide disparities on those long range graphs of the three brokers).

I therefore believe (rightly or wrongly):

E*Trade weighs more than Schwab. On a comparative basis, it should be higher after two years. Schwab itself may be significantly undervalued (they are executing very well, they just carry more baggage) which only adds to the potential upside.

I will be looking very closely at the comparative numbers on these three companies in the upcoming earnings announcements. I've been working out some numbers for myself so I have an (internally) objective lens to view the actuals through. I have to know whether E*Trade missed, met or exceeded my expectations, market be damned.

As an aside, I am aiming to make my write up of this upcoming event as my three star post (500th). I was also aiming to get my recommendations up to at least 10%, but I've already passed that. It's tough work because I've been so busy since that rating system was added and the bulk of my posts predated the change.