TradeStation Looks to Trade Higher

This alert was originally sent to subscribers of TheStreet.com's Stocks Under $10 on Sept. 16 at 1:25 p.m. EDT and is being reprinted here as a special bonus for TheStreet.com readers.

We are initiating a 400-share position in online brokerage firm TradeStation (TRAD:Nasdaq). Shares were recently trading at $9.62, and we believe this Stealth Stock could deliver as much as 50% upside in the coming year.

TradeStation, which is less than 5% the size of its larger brethren Charles Schwab (SCH:NYSE) and E*Trade (ET:NYSE) as measured by customer asset and market capitalization, hit our radar screen as a low-dollar way to gain exposure to the online trading industry. The company's trading software is a hit among professional online traders who trade sophisticated instruments like currencies and futures. This reputation helped TradeStation increase its total number of accounts in each of the last 14 quarters, and by 14% in the first half of 2005 to 21,000.

One of the best ways to track TradeStation's financial performance is to monitor its DARTs, or daily average revenue trades (the total revenue-generating trades for a period divided by the number of trading days in that period), which are released monthly. The company's August DARTs, reported on Sept. 6, were 39,496. This was some 32% above 2004's August DARTs and well ahead of competitors like E*Trade and Ameritrade (AMTD:Nasdaq), which saw DARTs grow in the low-single digits. Plus, TradeStation's client assets of $1.26 billion were up 15% year over year.

TradeStation has a history of strong revenue and earnings growth. At the end of 2004 the company had grown its top line by 48% over the two-year period, 2003 and 2004. Wall Street is calling for 2005 revenue of $95 million, which would be a 34% improvement from 2004's results. Equally as impressive, earnings have leaped from just 4 cents a share in 2002 to 33 cents a share in 2004 because of the strong top-line growth, expanding operating margins and a steady share count. For 2005, the Street is forecasting a profit of 45 cents a share.