Online Brokers Heat Up

Great news from Wit Capital (WITC) is turning out to be good news for other online brokers.

Wit executives on Thursday said the company will be profitable this quarter and will blow away revenue and earnings estimates when its quarterly report is issued during the week of April 17.

By noon Friday, shares of WITC were trading at 20 >, up 26 percent over Thursday’s closing price of 16 9/16. If that price holds for the day, it would be the first time since November that Wit Capital shares closed regular trading hours above $20.

Since Wit credits its strong quarter to a red-hot market for online trading, its pre-earnings announcement also boosted the stock prices of several other online brokers. E*Trade Group (EGRP) was up 11.4 percent to 31 1/16 by noon, with a trading volume of 11.7 million shares, topping even America Online’s (AOL) volume of 10.2 million shares.

Also gaining through noon were Web Street (WEBS), up 10.5 percent; DLJdirect (DLJ), up 9 percent; Charles Schwab, also up 9 percent; and Ameritrade (AMTD), up 7 percent.

It’s no fluke, and you can expect online brokers to stay hot through next month’s round of earnings, for this sector has been underperforming for several months.

A look at the year-to-date performance for a number of online brokers through Wednesday’s trading tells the story:

Web Street, down 28 percent

onlinetradinginc.com (LINE), down 24 percent

Ameritrade, down 11 percent

Wit Capital, down 8 percent

Only DLJdirect (up 1 percent) and EGRP (8 percent) had gained ground this year through Wednesday. But with Friday’s surge, EGRP was up 19 percent for the year through noon trading.

If you look at the numbers more closely, though, it’s clear online brokers had begun to turn around in February. Over the past month, only onlinetradinginc.com was down through Wednesday. DIR was up 47 percent, EGRP 43 percent and AMTD 31 percent.

What happened is investor confidence in online brokers, which had been shaken last year when trading volume fell off and marketing costs skyrocketed, returned in the wake of reports early this year showing strong growth in trading volume.

Since then investment banks have been raising revenue and earnings estimates for online brokers. On Thursday alone, U.S. Bancorp Piper Jaffray increased revenue estimates for E*Trade and Ameritrade.

Of course, heightened expectations can lead to disappointment. But look for many of these companies to turn in strong quarterlies next month that will easily clear the higher bar set by analysts and investors.

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