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No. of Recommendations: 8
I'd like to talk about Schwab and why I think it's so attractive, but first read Tilson's report about Etrade.

A famous saying attributed to Rothschild about making money is “Buy Expensive when everything is cheap, and sell cheap when everything is expensive.” Aside from being a recommendation for contrarian thinking, my interpretation is: buy top quality when everything is cheap, and sell quickly when the market is high, don't wait for a top. Now if we could all be this smart…

Now for Schwab. Let's imagine for a minute that the market for soda companies was oversold and suddenly an investor could buy all kinds of beverage companies on the cheap. Even at that environment I would expect Coke to sell at a higher valuation than its peers because of its superior brand and solid management. I'd rather buy Coke in an oversold market for soda companies, then a second tier company that might be selling for much cheaper. It seems to me that E-Trade is the second tier broker and Schwab is the leader. It's evident from the prices they charge. A trade at Schwab is $30, while at E-trade it's $20. After all, a trade is a trade. Still, Schwab is able to charge a lot more for the same exact product. Assuming the cost for a trade is similar, Schwab is making much more money.


Share price $4.30 $8.57 $3.40
Market cap ($B) $1.6 $11.7 $0.74
Book value/share $4.14 $3.14 $1.77
Tangible BV/share $2.78 $2.69 $0.69
Price/BV 1.0x 2.7x 1.9x
Price/Tang BV 1.5x 3.2x 4.9x
P/E ('02 est.) 9.6x 26.0x 34.0x
P/E ('03 est.) 6.8x 19.0x 11.0x

This is Tilson's numbers. (Meanwhile, SCH is up to $10!!). I can see Tilson's point about ET's undervaluation but In my mind, although E-trade is cheaper I have less confidence about their management. They might squander shareholder value. I also think Schwab looks especially good considering the big Wall Street brokers are in trouble with many forms of double dealing. I believe Schwab can profit from the fallout of large customers.

In short, SCH is the Coke in this scenario. Buy Expensive when everything is cheap.
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