Top Picks 2016: E*Trade Financial

01/26/2016 7:00 am EST

Focus: STOCKS

Crista Huff

Editor, Cabot Undervalued Stocks Advisor

Our Top Pick for growth potential in the coming year is an online brokerage firm that offers retail investors financial brokerage and banking products and services, notes Crista Huff, editor of Smart Investing in Turbulent Times.

E*Trade Financial (ETFC) also offers balance sheet management, including loans, deposits, payables, and asset allocation.

2016 revenue is projected to expand by 22%, enhanced by increased daily average trading volumes, and net new brokerage accounts.

Rising interest rates should boost E*Trade's net operating interest income, which represented about 60% of total net revenue in 2015. In addition, a 2015 departure from its mortgage loan business will improve E*Trade's balance sheet.

Consequently, Moody's Investors Service raised its ratings on E*Trade Financial and E*Trade Bank in December.

The Wall Street consensus EPS estimates for 2016 and 2017 reflect 36% and 20% growth (December year-end). The stock's 2016 price/earnings ratio (P/E) is 18.8. ETFC traded in a P/E range of 16 to 27 in recent years.

In November, E*Trade announced that it will buy back up to $800 million of its common stock through March 31, 2017. This was the company's first repurchase announcement in eight years.

Institutions own 96% of ETFC shares. Wow! That means professional investors think ETFC is a great investment.

The stock traded between $24 and $31 for most of 2015. I expect ETFC to climb to the upper $30s in 2016, barring any significant bad news.

ETFC is an undervalued aggressive growth stock, appropriate for risk-tolerant growth investors.

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