E*TRADE Stock May Have Room to Grow: Zacks

Shares of E*TRADE, the New York-based online brokerage, have been surging all year, up 36% as the stock market continues its bull run unabated. With the stock up 14.2% so far in the current quarter, investors are wondering if there is more room for it to go higher. Zacks Investment Research confirmed the possibility for continued growth in a recent report, highlighting improving operations, a rising interest rate environment and the likelihood that financial companies will face less regulation in the new year. Another positive for E*TRADE Financial Corporation (ETFC) is tax reform, which will slash the corporate tax rate.

"This price performance [in E*TRADE] is backed by the gradually improving operating environment and rate hike scenario which is beneficial for brokerage business," wrote Zacks in its report. "Furthermore, anticipated improvement in trading activities and several ongoing initiatives will bode well for E*TRADE." Zacks pointed to daily average revenue trades, or DARTs, for October and November as reasons to be optimistic about E*TRADE's prospects.

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In October, E*TRADE said that DARTs came in at 215,689, marking a 7% increase from September and a 28% jump year over year. Derivatives accounted for 31% of DARTs during October. In November, the online brokerage said that DARTs increased 19% compared with October, with derivatives again comprising 31% of the total for November. The company said that it added 41,473 gross new brokerage accounts during November and ended the month with about 3.6 million brokerage accounts, which is flat with October. DARTs is a way to measure the performance of a brokerage because it shows investors' willingness to invest in stocks.

In addition to increasing DARTs, Zacks said that shares of E*TRADE are "undervalued" on a price-to-book ratio basis. The firm noted that E*TRADE's P/B ratio is at 2.16 compared with 3.27 for the average stock on the S&P 500. "Fundamentally, E*TRADE's earnings have surged 29.56% annually over the last three to five years. This impressive earnings growth momentum is anticipated to continue in the near term as well," Zacks wrote.

The investment research firm noted that an increase in interest rates will also bode well for the discount brokerage, given E*TRADE already obtains 60% of its total revenue from net interest income, according to Zacks. What's more, Zacks predicted that, as business improves, E*TRADE will "gradually enhance shareholders' value" by purchasing shares and paying a dividend.  E*TRADE shares were recently trading down 0.69%, or $0.34, to $49.23.