Tuesday's big score at TD Ameritrade ( AMTD) has investors expecting big things out of the online brokerage stocks. Buoyed by Ameritrade's 69% rise in fiscal first-quarter profit, shares in rival E*Trade ( ETFC) rose Tuesday. Fans are betting the online trader will match Ameritrade's gains when it reports quarterly earnings later this week. The news comes as Wall Street takes another look at the sector, which has languished over the last five years. Until recently, small investors had lost their taste for the market as stocks flatlined and real estate prices soared. But now, with the Dow hitting new highs almost daily and the Nasdaq finally breaking out of a six-year-long slump, investors are starting to reassess the prospects of these companies. "The retail investor is coming back and the online brokers are the most pure-play means to invest in this trend," Prudential analyst Mike Mayo said during a recent conference call. "Profit margins at the online brokers are double the full service players. They're more online. They have less infrastructure." The analysts expect 10% growth in net new asset at Schwab ( SCHW) this year, leading to 20% earnings growth. They also predict 30% growth in new deposits at E*Trade. Prudential Equity Group calls the online brokers a top pick this year. Schwab is set to report fourth-quarter earnings on Wednesday, and E*Trade will report on Thursday.
The brokers are scrambling to add investment services and products to cater to the so-called mass affluent investor -- one with between $100,000 and $1 million in investable assets. Online brokers also are looking to diversify beyond online trading, where margins have been narrowed by fierce price competition. Last week, Just2Trade.com became the latest outfit to enter the fray, advertising an unlimited amount of trades online for $2.50. Others are promoting free online trades, such as Bank of America ( BAC) and Zecco.com. Joe Moglia, TD Ameritrade's CEO, says that the impact of free online trading has been "negligible." He said Tuesday that Ameritrade is becoming more of an asset gatherer and "the provider of choice to the mass affluent family in this country." TD Ameritrade's profit gain came on the heels of last year's merger between Ameritrade and TD Waterhouse's retail brokerage business. The company made the deal in an effort to add financial advisers to its offerings. "We're pleased with our revenues, our assets, our trades, our net new accounts," Moglia says. But the "growth of qualified accounts -- we'd like to see them improve." Moglia cautioned that that won't happen until the integration of TD Waterhouse and the new client segmentation platform are completed. He added that the company is also creating a new commissioned-based sales and service team to replace the 100 or so employees that were housed in call centers across the country.
The Omaha company's average client trades per day rose 52% from a year ago and 16% from the previous quarter, to 238,000. On Tuesday, shares of TD Ameritrade rose 98 cents, or 5.6%, to $19.33; E*Trade rose 49 cents, or 2%, to $25.51; and Schwab fell 11 cents to $20.24.