Charles Schwab Stock Is Fairly Priced

SCHW: Charles Schwab logo
Charles Schwab

[Updated 12/11/2020] Charles Schwab Update

We believe there may be better places for your money than Charles Schwab stock (NYSE: SCHW) at the present time. The brokerage giant trades at $50 currently and is 6% ahead of its pre-Covid high in February. Also, SCHW stock has gained 76% from the lows of $29 seen in March 2020, after the multi-billion dollar stimulus package announced by the U.S. government, which has helped the stock market recover to a large extent. The stock is leading the broader markets (S&P 500 is up about 65% since March lows), as investor sentiment is positive due to growth in its asset management division and acquisition of TD Ameritrade (integration completed in October), which created a company with approx. $6 trillion in client assets across 28 million brokerage accounts.

Charles Schwab is heavily dependent on revenue from interest on deposits, loans & securities (contributed around 61% of total revenues in 2019). Due to the ongoing Covid-19 pandemic and economic slowdown, the net interest yield has suffered and is likely to hurt Charles Schwab’s top line. While the brokerage giant outperformed the consensus earnings estimates in its recently released Q3 results, its revenues missed the mark. It reported net revenues of $2.45 billion – 10% lower than the year-ago period, mainly driven by an 18% drop in net interest revenue. Similarly, its nine months consolidated revenues have decreased by 7% y-o-y mainly driven by a 13% drop in net interest income. Further, we don’t expect the lower interest environment to see an immediate recovery. On the flip side, the company has witnessed a spike in daily-average trades since February (which implies higher trading activity in the stock market). However, the elimination of trading commissions late last year means that Schwab’s revenues aren’t going to benefit directly from this.

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Overall, Charles Schwab revenues are likely to suffer in the near term. But, as the economy inches towards normalcy and the interest rate environment improves, it is expected to see some recovery. In view of the strong rally in Charles Schwab stock since late March, we believe that the stock is fairly priced and will largely trade sideways in the near future even after factoring in an expected improvement in demand despite the recent surge in the number of new Covid-19 cases in the U.S. Our conclusion is based on our detailed analysis of Charles Schwab’s stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.

[Updated 6/17/2020] Charles Schwab Has Rallied 30%, Now What?

Charles Schwab’s stock (NYSE: SCHW) has rallied 30% over recent weeks (vs. about a 37% gain in the S&P 500) to its current level near $37, after falling to a low of $28 in late March as the rapid increase in the number of Covid-19 cases outside China spooked investors. But the stock remains 22% below the $47 peak it reached in mid-February, and we believe it can recover to the $43 level (15% upside) once fears surrounding the coronavirus outbreak subside. Our conclusion is based on our detailed comparison of Charles Schwab’s stock performance during the current crisis with that during the 2008 recession in an interactive dashboard analysis.

How Did Charles Schwab Stock Fare During The 2008 Downturn And What Does It Mean For The Stock This Time Around?

We see SCHW stock declined from levels of around $20 in October 2007 (the pre-crisis peak) to roughly $11 in March 2009 (as the markets bottomed out) – implying that the stock lost as much as 42% of its value from its approximate pre-crisis peak. This marked a lower drop than the broader S&P, which fell by about 51%.

However, SCHW recovered strongly post the 2008 crisis to about $17 in early 2010 – rising by 50% between March 2009 and January 2010. In comparison, the S&P bounced back by about 48% over the same period.

In comparison, SCHW stock lost 40% of its value between the market peak on February 19 to the low on March 23, and has already recovered 30% since then. Keeping in mind the trajectory over 2009-10, this suggests a potential recovery to around $43 (15% upside) once economic conditions begin to show signs of improvement. This marks a partial recovery back to the $47 level SCHW stock was at before the coronavirus outbreak gained global momentum.

But When Can We Expect This Recovery In Charles Schwab Stock?

The rally across industries over recent weeks can primarily be attributed to the Fed stimulus which reduced investor concerns about the near-term survival of companies. The gradual lifting of lockdowns globally has also helped the demand for some non-essential goods recover. Over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. While Q2 results will be weak, investors will focus their attention on full year 2020 results – helping Charles Schwab stock trend higher over the latter half of the year. More information about Charles Schwab’s revenues forecast over FY 2020-21 is available in our interactive dashboard.

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.


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