E*Trade's Hurdles

It's so easy to kick discount broker E*Trade (Nasdaq: ETFC) when it's down. Standard & Poor's Ratings Services is downgrading its debt.

Yes, the picture is ugly. Regulators want the company to raise new capital as it continues to pay for its aggressive online banking mistakes. With $8.1 billion in debt, E*Trade's balance sheet won't win any beauty pageants. Its income statements aren't any prettier, with seven consecutive quarterly losses.

But when will E*Trade be given credit for its growth? It tacked on 32,550 net brokerage accounts in April alone. It now sports a record 4.5 million accounts.

It's struggling in attracting new banking accounts, but that's not a surprise. E*Trade's bread-and-butter Complete Savings Account (CSA) has gone from yielding 3.01 percent at the beginning of the year to a puny 0.95 percent recently.

If the growth is gravitating toward its discount brokerage business, that's a good thing. Many of E*Trade's peers, such as TD Ameritrade, are consistently profitable.

The hurdles along the way — billions in debt, deficits projected to continue in the near term and regulator capital requirements — won't be easy to clear. However, at this price (down more than 90 percent over the past two years), and with so much potential upside if it catches up to its discountbrokerage peers, it's an intriguing speculation. Proceed with caution, though.