Q What are prospects for my shares of E-Trade Financial Corp.?
M.L., via the Internet
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A Though a talking baby is the voice of this online discount brokerage in its commercials, the financial problems stemming from previous risk-taking are hardly child’s play.
On the plus side, it has added new accounts, losses have narrowed, and loan delinquencies have flattened.
Yet low trading volume and low interest rates have prompted it to reduce commissions and fee structure. It is refocusing on its core online brokerage business as it tries to recover from a disastrous bet on mortgage securities that resulted in it having to sell assets and raise capital.
The company remains vulnerable should the economy or markets slide. The prognosis for this speculative holding is that it will get its business back on track or sell itself to another financial services company. The latter is behind some of the stock price jumps of recent months.
Shares of E-Trade (ETFC) recently were down 3 percent this year after last year’s 35 percent rise. It is seeking shareholder approval for a 1-for-10 reverse stock split that will reduce the number of shares and increase the share price. It does not pay a dividend.
After months of searching, E-Trade recently named former Citigroup Inc. executive Steven Freiberg as its new chief executive, signing the 53-year-old to a four-year contract. Freiberg spent 30 years at Citigroup and was in charge of the global consumer group.
Consensus opinion on shares of E-Trade is between “buy” and “hold,” according to Thomson Reuters, consisting of three “strong buys,” two “buys,” nine “holds” and one “underperform.”
E-Trade offers sweep, checking and savings products to its brokerage clients. It has about 4.5 million client accounts and $26 billion in deposits. While E-Trade is no longer in financial distress thanks to the injection of new capital, cash flows could be uneven as it shifts its mix of investments.
Earnings are expected to increase 98 percent this year compared with the 62 percent rise forecast for the national investment brokerage industry, according to Thomson Reuters.
Q I would like your take on Parnassus Small-Cap Fund.
P.J., via the Internet
A This strong-performing fund launched in 2005 is run by Jerome Dodson, the founder of Parnassus Investments and a veteran of socially responsible investing.
Espousing strong investment and moral philosophies, Dodson puts a considerable amount of his own money in the funds. Some of his social screens include treatment of employees, workplace diversity, environmental responsibility and support for community. He won’t invest in companies involved in alcohol, tobacco, weapons or nuclear power.
The $173 million Parnassus Small-Cap Fund (PARSX) recently was up 66 percent in the last 12 months, to rank in the top quarter of small growth and value funds. Its three-year annualized return of 5.7 percent places it in the top 2 percent of its peers.
“It offers good downside protection and management that can do well in different market environments,” said Katie Rushkewicz, analyst with Morningstar Inc. “Since the fund has a small-cap focus, at times small caps can be out of favor, so it should be a supporting player in an individual’s portfolio.”
With 25 years of investing experience, Dodson consistently looks for firms with a strong market niche, good five-year intrinsic value and low price. He usually holds positions for three years, the fund has reasonable expenses, and he is supported by seven analysts and a trader.
Industrial materials companies represent one-fifth of the fund’s holdings, with other significant concentrations in hardware, telecommunications and business services.
This “no-load” (no sales charge) fund requires a $2,000 minimum initial investment and has an annual expense ratio of 1.20 percent.
Q How much debt should a person have relative to his income?
H.C., via the Internet
A
A general rule of thumb among financial planners is that you should not permit your non-mortgage debt to consume more than 20 percent of your net income. Car payments can take quite a bit of that.
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In addition, 28 to 33 percent of your pay would typically go toward your mortgage, including taxes, insurance, interest and principal.
“That means you’re committing about half your income to house payment and debt service,” said Catherine Williams, vice president of financial literacy for the nonprofit Money Management International counseling service.
Andrew Leckey answers questions only through the column. E-mail him at [email protected].