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Trading on E*Trade

Is E*Trade Financial (ETFC) down so far that it's looking up?

On Friday, Sept. 18, Goldman Sachs (GS) upped its rating on the long-suffering online trader and home lender to "buy," following Citigroup's (C) similar upgrade earlier in the week. Shares soared 8% to close at 1.84. The next Monday they rose further, topping 2 at midday, some 3.5 times their low of 0.59 in March.

The good news is that E*Trade may be moving beyond its credit problems. Goldman forecasts that it will return to profitability by the end of 2010. Also, E*Trade showed trading volume gains in August of 18% over the previous month and 37% over the previous year. The big question: whether E*Trade—whose chief executive, Donald Layton, is stepping down by yearend—is takeover bait. With the shares up so much, caveat investor. As Barclays Capital analyst Roger Freeman, who rates the shares "neutral," writes in a recent research note: "We believe [investors] are already discounting a fair amount of the macroeconomic improvement that we have already seen."

The Preferred Approach

High-yield bonds aren't the only risky asset to benefit from investors' renewed quest for higher returns. Preferred stocks, which trade like equities but earn most of their return from fixed dividends, have more than doubled from their March low—they were down nearly 50% during the first two months of 2009. (The stocks are "preferred" because their holders receive dividends before shareholders of the common stock get paid.)

On Sept. 17, State Street (STT) launched the SPDR Wells Fargo Preferred Stock ETF, which competes with two other exchange-traded funds, the PowerShares Preferred Portfolio (PGX) and the iShares S&P U.S. Preferred Stock Index Fund (PFF). Like those two, the SPDR boasts a hefty dividend yield—topping 8%—and has a portfolio that is more than 80% financial companies. But it tries to reduce some of the risk by maintaining a highly diversified portfolio—it holds 164 securities, more than the other two funds combined (the PowerShares fund has 67, the other 94). Says Matt McCall, a financial adviser with Ridgewood (N.J.)-based Penn Financial Group: "It's a more conservative approach."

Hit or Miss?

Shares of Raytheon (RTN) rose 5%, to 48.33, in the two trading days after President Obama's Sept. 17 announcement of a change in plans for a missile defense system in Eastern Europe. The defense contractor is expected to benefit from deployment of a new strategy that uses its Standard Missile-3. But analysts at JPMorgan (JPM) cite big risks, including U.S. defense budget cuts and delays in the awarding of international contracts because of the downturn. They do expect a slight gain by December, to 52. "Its international growth prospects" and low-debt balance sheet "could still yield some modest expansion," according to JPMorgan. But at 52, the stock would be at breakeven for 2009. An index of S&P 500 aerospace and defense companies, meanwhile, is up 15% so far this year.

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