UBS Upgrades E-Trade, Downgrades TD Ameritrade After Commission-Free Shake-Up

Discount broker stocks were pounded last week after most of the biggest names cut stock and ETF online trading fees to $0. The commission cuts will create near-term growth headwinds for the group, but one analyst said Monday the sell-off is a buying opportunity in one top broker stock.

The Analyst

UBS analyst Brennan Hawken upgraded E*TRADE Financial Corp ETFC from Neutral to Buy and cut his price target from $45 to $41.

Hawken also downgraded TD Ameritrade Holding Corp. AMTD from Buy to Neutral and cut his target from $40 to $33.

The Thesis

Hawken said E-Trade has attractive assets and strategic upside, and the stock’s 14.4% drop in the past week has created a compelling risk-reward opportunity.

“While recent price cuts have clearly lowered earnings power for the industry, we believe the corporate services and active trader franchise, which lend themselves to stronger growth, larger margin balances, and a higher proportion of derivatives trading are attractive,” Hawken said in the note.

Hawken named E-Trade his top stock pick among discount brokers.

While Hawken said TD Ameritrade shares are fully pricing in the negative earnings impact of eliminating commissions, there's no clear path to multiple expansion in the near term. Given the company doesn’t have a permanent CEO in place, Hawken said investors will also likely be waiting a while before a clear long-term strategy is in place.

Looking ahead, Hawken said it’s unlikely TD Ameritrade will be able to outgrow its peers, and valuations among the discount brokers are likely to converge, limiting TD’s upside.

Benzinga’s Take

The aggressive sell-offs among broker stocks in the past week may have ultimately created some long-term buying opportunities if brokers are able to offset lost fee revenue via other means, such as payment for order flow. However, until investors get a baseline sense of what to expect from the brokers in a zero-commission landscape, near-term risk will remain elevated in the group.

Do you agree with this take? Email feedback@benzinga.com with your thoughts.

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