Go For Broke(r) With This Financial Services Firm

Often it pays to go against the crowd. Interactive Brokers started a commission war with other online brokerage firms last week when it announced commission-free trading on a new, light trading platform. On Tuesday, Schwab decided to match that with the exception of options trading, which will still incur 65 cent per contract fees. Later in the day, TD Ameritrade pretty much followed suit to defend its market share. E-Trade Financial then did the same. Cutting commissions will negatively impact profits, at least in the short run. Over time, brokerage firms and banks tend to find alternative ways to collect fees when traditional profit centers are threatened by competition or legislation. The fiduciary rule, which was never actually implemented, would have forced brokerage firms to stop charging commissions in retirement accounts. The firms simply switched the majority of their clients into fee-based accounts, which more than offset the commission income, which would have been lost. When consumer protection boards limited late fees and bounced-check charges some years ago, banks started charging for previously free services like checking accounts. There is always an alternative way to regain income for providers of multiple services, many of which were previously bundled as free. Tuesday saw a greater than 25% plunge in TD Ameritrade. The company's near-term profit picture will be negatively impacted, but its long-term health should be just fine. That huge sell-off appears to be an overreaction. Why do I say that? AMTD just finished fiscal 2019 (ended Sep. 30, 2019), with record-breaking results. Value Line is looking for $3.85 for the trailing year when the fourth quarter is in the books. Yahoo Finance's consensus estimate for fiscal 2019 sits at $4.03. That is up from $2.59 in fiscal 2018. At $34.67, AMTD was down to just 9-times trailing earnings and yielding 3.46%. Those compare with 2010-2018 normalized levels of 20-times accompanied by around 1.6% in yield. Assume fiscal 2020 will be lower, at about $3.30 in earnings per share, or EPS, and that the stock's multiple will only recover to 17-times. That still suggests a 12- to 15-month target price of $56.10. Achieving that somewhat modest rebound would generate 65% in total return. That goal is not far-fetched. AMTD topped out at $63 last year and hit almost $58 year-to-date. It hasn't been available anywhere close to this cheap since the dark days of 2009. Independent research from Morningstar took Tuesday's news into consideration before lowering its present-day fair value estimate on TD Ameritrade to $61, from $63 previously. Option savvy traders can play AMTD via call buying or put selling. At the Tuesday closing quote these were the actual spreads and last trades on some of its Jan. 21, 2022 expirations. Selling puts at $35 or $40 would have brought in either $7.00 or $9.40 respectively. That dropped the if exercised price down to just $28 or $30.60. Future stock market action can never be guaranteed. That said, AMTD hasn't changed hands as low as either of those forced purchase prices in more than three full years. During that time EPS climbed by about 144%. Dividends went from 58 cents annually to $1.20. AMTD spent most of the past three years trading between $40 and $60 on much lower fundamentals than are in effect now. Why be scared to own it near $30? Buying LEAP calls on AMTD is a bit riskier than selling puts, as you'll need a small gain before getting to break-even. Upside leverage, though, is huge. If AMTD reaches my target price not later than expiration day, potential profits would run at least 195% to 251%. They could be higher. On Wednesday, the Dow Jones industrial average dropped more than 600-points intraday. Shares of AMTD, SCHW, E-Trade and others fell a bit further. If you like my reasoning, you can now get even better entry points on those stocks and more generous option premiums also. Check your quotes before entering any trades.

Go For Broke(r) With This Financial Services Firm

TD Ameritrade is poised to offer big returns at a low entry point.

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