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Editorials, Wednesday, 06/07/2000

DLJ Names Top Internet Finance Picks
By Cindy Christ

Donaldson, Lufkin & Jenrette Securities started coverage of the Internet financial services industry Wednesday, naming E*Trade Group its "Top Pick" with a 12-month price target of $31.

Shares in E*Trade (EGRP) vaulted more than 14 percent on the call, closing up $2.38 at $19.25.

"E*Trade is the fourth largest online broker in terms of customer assets, third largest in terms of active accounts, and second largest as measured by number of trades executed per day," analyst Richard Zandi wrote in a research alert.

"We believe that dire outcomes are already priced into the stock and view current levels as an excellent buying opportunity," Zandi added.

DLJ also launched coverage of rivals TD Waterhouse and Ameritrade and market maker Knight Trading Group with "buy" ratings.

Stocks in the e-finance sector have had a rough year so far, as rising interest rates pummeled trading volume as well as major market averages. But while the Nasdaq has rebounded from its recent dive, shares in most Internet brokers still trade just above 52-week lows.

TD Waterhouse, the nation's No. 4 online broker based on accounts, advanced on the upgrade despite cautious remarks about its growth rate.

"TD Waterhouse targets the upper middle class online investor. Given its business model and larger size, we expect TWE to grow at a slower pace than its rivals," Zandi said.

Shares in TD Waterhouse (TWE) jumped 3.5 percent to $18.31, still well below DLJ's 12-month price target of $31.

Zandi put a $19 price target on Ameritrade (AMTD), which added $0.75, or 6 percent, to $13.31.

Market maker Knight (NITE) leaped $2.12, or 7 percent, to $32.38.

Jersey City, N.J.-based Knight is the leader in its space behind Schwab Capital Markets, the market maker arm of top discount broker Charles Schwab.

"We believe NITE represents one of the most exciting ideas in the Internet financial services space," Zandi said. "NITE's success derives from the superior execution it provides retail investors."

Shares in Knight plunged more than 17 percent during the last two sessions in the wake of Merrill Lynch's $915 million acquisition of No. 3 market maker Herzog, Heine & Geduld.

Investors unloaded Knight shares in droves on concerns it would lose Merrill's business and on fears the combination would threaten Knight's No. 1 market position.

With Merrill generating just 0.8 percent of its total revenues, Knight said in a statement yesterday the deal would have limited impact on its business.

In addition, Merrill later confirmed its intent to maintain order flows to Knight, leading some analysts to view the deal as a boon for the wholesale stock dealer.

"While the increased liquidity of combining two major market makers could be attractive to the institutional market, we believe that the potential gains in market share will be offset by Herzog's loss of neutrality, an important criteria for large order flow providers like E*Trade," said Robertson Stephens Senior eFinance Analyst Scott Appleby in a research note to clients.

"We believe the merger actually could create an opportunity for NITE to gain trading volume from the online and discount brokers who compete directly with Merrill," Appleby added.

Robertson Stephens, which also rates Knight a "buy," has set a price target in the range of $70 to $80 for the market maker.

Market making is a highly profitable practice that maintains order balance between buyers and sellers of Nasdaq stocks. Intermediaries called "specialists" perform a similar role for issues traded on the New York Stock Exchange.

Unlike most traders, market makers are privy to supply and demand information for a given security, an advantage that can translate into huge profits from buying and selling stocks in their own accounts.

Although experts have warned that electronic trading networks called ECNs would render market makers obsolete, Merrill's decision to shell out nearly a $1 billion to gain a dominant role in the space confirms the business is here to stay.

It also may portend similar moves by other Wall Street titans in the weeks ahead, upping Knight's appeal as the only takeover target left.

 


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