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Bottom Fishing for E-Brokers

Yesterday's announcement from Knight/Trimark Group Inc. (NITE) is no fluke. The third quarter for online trading slowed.

Knight/Trimark is a leading Nasdaq market maker, dealing in over 7,000 stocks (the firm makes money from the difference between the bid and ask prices of a security). The company warned analysts that their estimates were completely off. Whereas First Call pegged estimates at 30 cents, Knight/Trimark said it will likely be between 17 and 19 cents. The company will report its earnings on Wednesday.

No doubt, the stock plunged 3-39/64 to 26-3/8. The stock traded as high as 81-5/8 in May.

The reasons for the revised estimates? First of all, there was a five percent fall in third-quarter trading volume compared to the second quarter. And, of course, volume is a critical earnings driver for any brokerage-related company.

Next, the company saw a fall in revenue-per-trade. In fact, the company classified the drop as "dramatic."

Of course, online brokers fell across the board. Here's a chart:

Companies

Price

Change

52-week

% off

Market Cap

     

high

high

(in billions)

E*TRADE

 $   25.94

 $   (0.94)

 $     72.25

64%

 $      6.00

DLJDirect

 $   15.13

 $   (0.63)

 $     45.63

67%

 $      1.50

Ameritrade

 $   18.88

 $   (0.88)

 $     62.75

70%

 $      3.20

NDB

 $   25.38

 $   (0.63)

 $     93.00

73%

 $      0.43

TD Waterhouse

 $   12.50

 $   (0.38)

 $     27.25

54%

 $       4.70

Schwab

 $   33.50

 $   (0.06)

 $     77.50

57%

 $     27.30

Siebert

 $   15.63

 $   (0.63)

 $     70.63

78%

 $      0.35

But as you can see from the chart, the e-brokers had only minimal falls. In other words, Wall Street seems to be pricing in the fact that there will be a slowing in earnings.

Also notice that these e-brokers are all selling more than 50 percent from their highs.

I think this represents a great opportunity.

But I would focus on the top-tier brokers. The one that looks particularly compelling is E*TRADE (EGRP) . In fact, the company reports its earnings on Wednesday. It has already pre-announced that revenues and trading volume will be flat.

Thus, there is definitely a possibility of a surprise, given the extreme negativity towards the sector.

Things, though, look bright for the short-term and long-term. The online brokerage industry is flush with cash and it is spending it on marketing campaigns, which will drive volume. For example, TD Waterhouse recently announced it will spend $100 million on an ad campaign with Geena Davis and Jackie Chan (TD Waterhouse raised $740 million in its IPO). In fact, according to Lehman Bros., the online brokerage industry will spend $1.2 billion in ads in the year 2000. More accounts, more volume.

But E*TRADE is building a tremendous platform to leverage the growing base of users.

For example, E*TRADE purchased Confluent Inc., which develops sophisticated personal finance tools -- such as for tracking corporate events, like earnings announcements, stock splits, dividend declarations, as well as track automatic deposits, bill presentment and investment plans.

By adding such value-added features, E*TRADE has been able to create a highly sticky site. The company is only second to eBay in minutes per user per month spent on its site (66.5 minutes)

Further, E*TRADE has been aggressively diversifying its revenue-base away from brokerage transactions. In a sense, E*TRADE is becoming a one-stop shop for financial planning.

The company recently invested in LoanCity.com, so as to provide home loans. There was also the purchase of Telebanc, the nation's largest online bank (it's bigger than the next five pure Net banks combined).

Perhaps the most compelling part of E*TRADE is the growth in international financial markets. This month, the company announced a joint venture with SOFTBANK to create E*TRADE Japan, so as to take advantage of the deregulation of commission rates in that country (Japan has the second highest number of Net users: 18 million). In all, E*TRADE has six global sites.

It is almost impossible to find a bottom for markets. But when there is very bad news -- such as from Knight/Trimark -- and the rest of the sector is relatively unaffected, this is usually a good sign of a bottom.


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