Insider Purchases & Buybacks: ETFC

While insider purchases could be a good sign, I don't advocate blindly following suit. In the current environment of increased uncertainty, it is very important to look at a company's fundamentals and not buy shares just because insiders have done so. One such company is E*Trade Financial (ETFC - commentary - Cramer's Take). (On Stockpickr, you can see the rest of the insider trades and buybacks portfolio).

In January, company directors Donald Layton and Donna Weaver bought 245,800 and 68,843 shares, respectively, for a $4.07 a share. Several other directors together purchased more than 152,000 shares of the retail brokerage firm, while CEO Jarrett Lilien bought 7,376 shares.

E*Trade was hit by the downturn in mortgage-related securities and reported a loss of $1.7 billion, or $3.98 a share, for the fourth quarter. This was far worse than what Wall Street had expected. The company had earned $176.7 million, or 40 cents a share, in the year-ago quarter. The loss reported by E*Trade compares poorly with rival Charles Schwab's (SCHW - commentary - Cramer's Take) earning of $308 million, or 26 cents a share, in the same quarter. Unlike E*Trade, Charles Schwab was able to generate asset growth during the quarter.

E*Trade has planned a turnaround program in which it hopes to bring down costs by $360 million this year. The plan also includes an $85 million reinvestment in marketing, service and product innovation and other growth initiatives. For its banking business, which has been severely hurt by the housing and mortgage crisis, the company aims at ending the year with about $1 billion in excess capital.

While the Street seems to be somewhat impressed by the company's efforts, I am still a little skeptical. E*Trade's credit quality deteriorated significantly in the fourth quarter. The balance sheet is weak and the company is still struggling against the rapid decline in the mortgage and credit markets. Also, as housing values continue to decline, the home equity loans on its books look even scarier.

While you can see the investment funds that own the company at Stockpickr, it is interesting to note that some smart funds have recently sold out their stakes in E*Trade. Eaton Vance Growth A (EVGFX) reduced its holding of the company. Managed by Arieh Coll, this fund has a Morningstar rating of three stars. The fund's objective is capital growth and it has five-year returns of 20.14%. The fund also holdss Research In Motion (RIMM - commentary - Cramer's Take), Gammon Gold (GRS - commentary - Cramer's Take) and Google (GOOG - commentary - Cramer's Take).

Shares have tumbled after trading above $25 in early June to right around $5. However, shares have rebounded to a certain extent after the company announced turnaround plans for the year. I do believe E*Trade offers a good product that allows investors to not only trade, but also earn decent yields in E*Trade's high-yield savings accounts. If E*Trade can right its balance sheet, then I would consider picking up some shares. However, I don't envisage a lot of upside over the next few weeks, as E*Trade could encounter more headwinds.

(On Stockpickr, you can see the rest of the insider trades and buybacks portfolio.)

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At the time of publication, Raznick had no positions in the stocks mentioned, although positions may change at any time.

Jason Raznick is president of Easy Stock Alerts and has been involved with the capital markets for several years. He has worked for Merrill Lynch, Dynamis and Tricap Holdings, a joint venture with Fortress Investment Group. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Raznick appreciates your feedback; click here to send him an email.