E*Trade's Investment Bank Pitches Research to Investors
By JASON ANDERS
THE WALL STREET JOURNAL INTERACTIVE EDITION
October 15, 1999
interactive.wsj.com
E*Trade Group's new investment-banking arm is wasting no time in trying to establish itself as a source for investment advice for online investors.
E*Offering has been issuing a steady stream of research reports on high-profile technology companies. And while older investment banks often only allow their clients to have access to analyst research, E*Offering has been giving its reports away to anyone and everyone. The firm announces its recommendations on PRNewswire, a news service commonly used by companies for announcing corporate news, and makes the full text of the reports available for free on its Web site.
All of this attention to home-grown research is a notable departure for the company that made its name as a home for investors who don't need guidance from their brokers in making investment decisions. But it also illustrates the pressure online brokerage firms face in luring and keeping customers, who may be do-it-yourselfers but still demand research tools.
E*Offering's Web site
"If you look at our account growth over recent years, you see we're attracting not just self-directed investors, but investors who want to make thoughtful investment decisions based on all the information they can find," says Steve King, an E*Trade vice president. "The bottom line is that these E*Offering research reports give our customers access to institutional-quality research online."
Timothy Newell, managing director of E*Offering in San Francisco, is a bit more blunt: "We're trying to help investors make money," he says.
Some securities regulators have called for scrutiny of whether online brokers may be walking a fine line when it comes to suitability requirements -- rules that prohibit brokers from suggesting investments that aren't appropriate for a particular client -- when they provide investment research and the like. "We're providing access to tools, not advice," says E*Trade's Mr. King. "Our clients make their own decisions."
E*Trade, of Palo Alto, Calif., is careful to maintain some distance between itself and E*Offering: When a user clicks on an E*Offering link on the E*Trade site, a message pops up with a reminder that E*Trade is a minority shareholder in the investment bank, and isn't trying to provide any investment advice. (Indeed, E*Trade owns about 25% of E*Offering, which was founded in January 1999 and is also funded by Sandy Robertson, founder and former chief executive of Robertson Stephens & Co.)
Still, E*Trade and E*Offering have a close relationship. On its Web site, E*Offering bills itself as "the investment bank of E*Trade." And E*Trade's Mr. King says there are plans to integrate E*Offering research directly into E*Trade's site.
The Sites
E*Trade
E*Offering
E*Offering has participated in several stock offerings, and will be lead managing its first initial public offering, for Espernet.com (www.espernet.com), a company that operates several Internet service providers, later this year. E*Trade customers get a crack at participating in offerings E*Offering is involved in.
E*Offering's Mr. Newell acknowledges that his research staff doesn't have the name recognition of a Merrill Lynch & Co. or a Goldman Sachs & Co., and says it's going to take time to establish trust with investors. "We think that over time we'll emerge as one of the leading voices on Wall Street in terms of technology and high-growth stocks," he says. "What it will take to get us there is demonstrating consistently that by investing in the companies we follow, investors will make money."
The firm has four analysts, covering exclusively Internet- and technology-related issues. Many of the most prominent companies -- including well-known Internet plays including Yahoo! and America Online -- are covered by Andrea Williams, who joined E*Offering in June after covering Internet companies for five years at Volpe Brown Whelan & Co. of San Francisco.
Seven of the nine stocks Ms. Williams covers trade solidly above the level they stood at before she initiated coverage, but it hasn't been a smooth ride for investors who have followed her picks. In many cases those stocks dropped soon after her coverage began.
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Ms. Williams, for instance, began coverage of Yahoo on July 15, when its shares closed at 154 7/16. But Yahoo, already in a downturn when her coverage began, continued lower after her "buy" recommendation, reaching 121 on Aug. 4. Its shares were trading at 168 in early trading on Friday. Likewise, when Ms. Williams initiated coverage, also on July 15, of portal Lycos, its shares closed at 51 31/32. But by Aug. 4, they had fallen to 32 15/16. Lycos shares were quoted at 57 3/16 on Friday.
Two stocks she follows have remained duds. Ms. Williams maintains a "buy" rating on online retailer Value America, though the stock has tumbled more than 40% since she initiated coverage July 16. And Starmedia Network has dropped about 40% since her report was released July 13.
Still, Ms. Williams scored a direct hit on About.com, another portal site. Its shares have soared about 34% since she initiated coverage Sept. 21.
Ms. Williams points out that she initiated coverage of several issues in the summer, shortly after she joined E*Offering, at a time when technology stocks were particularly volatile. "Our recommendations are always based on a long-term horizon. We're not catering to day traders or people who will buy a stock now and sell it next week," she says.
Richard Repetto, an analyst at Lehman Brothers Inc. who follows E*Trade, says he's not convinced online investors are using research reports. He added, though, that it's clear investors expect their online firms to give them access to such tools, if for no other reason than the fact that other firms are offering them to their clients.
E*Offering hopes its research will emerge as a welcome alternative to reports that Wall Street firms distribute selectively to clients. "We're going to give E*Trade customers and other retail customers the same access institutional clients have," he says.
He also promises E*Offering will differ from some of its investment-banking peers in another way: The firm won't hesitate to issue "sell" recommendations on stocks. "We are committed to giving good advice to all of our customers, and that means we want to help them on the way up and on the way down."
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Write to Jason Anders at jason.anders@wsj.com. |
