While most of this past summer’s attention was focused on flashy tech names who seemed to print all-time highs on a daily or weekly basis, there were plenty of stocks stuck in industries that were just about treading water and trudging along. In the financial services sector,
Charles Schwab (NYSE: SCHW) was one such name. Known mostly for their
online brokerage and trading services, the $80 billion company took a 40% haircut back in Q1 and was still trading near its March lows as recently as September.
In the past six weeks, however, shares have popped more than 30% and are back to pre-COVID levels. For many, this has become the bellwether or finger-in-the-air metric by which to judge individual equities in the second half of 2020. With their recovery almost complete and a solid rally underway, they’re well worth their place in your watchlist if not your portfolio.
Fun Times Ahead
It’s been an interesting year for online brokerages, most of whom in the past twelve months have slashed their online commissions to $0 a trade as the competition reaches new heights. At the same time, there has been plenty of M&A activity, with Schwab paying more than $20 billion for TD Ameritrade in a November 2019 acquisition that was completed last month. At the time the announcement was made, the news was enough to send Schwab shares to 52-week highs before that momentum fizzled out with the onset of the coronavirus pandemic.
As that starts to look smaller and smaller in the rearview mirror, the savvy investor is starting to consider the long term potential of one of the world’s biggest online brokers, at a time when retail trading has never been so popular or accessible. For context, customer usage of Schwab’s educational database is already up more than three times compared to 2019.
It is with all this in mind that Deutsche Bank saw fit to upgrade Schwab shares on Wednesday, moving them from a Hold to a Buy rating. A fresh price target of $53 implies upside of at least 20% even from Thursday’s closing price and would put shares at their highest levels since 2018. Analyst Brian Bedell is bullish overall on equity markets now that we’re in the post-election cycle and that uncertainty has been removed. With that in mind, now’s the time to start picking up names that missed out on this summer’s rally as there’s huge potential for a catch-up play. Specifically for Schwab, he notes the “solid growth and merger integration fundamentals” while forecasts for 2021 that see a steepening yield curve also add to the bull thesis.
Solid Momentum
The company’s October earnings report came in ahead of analyst expectations on both the top line and bottom line with management striking a bullish tone with a view to the year ahead. CEO Walt Bettinger summed it up well when he said; “following yet another quarter of strong business fundamentals, we find ourselves at a pivotal moment in Schwab’s history – one made possible by the groundwork we’ve been laying over the course of four-plus decades. As a result of our watershed acquisition of TD Ameritrade, which closed on October 6, 2020, we have created a company with tremendous reach.”
It feels like over the past month or so Wall Street has caught onto the value play opportunity with Schwab shares and investors still on the sidelines would do well to consider the long-term play that’s afoot. A 1.6% dividend yield pays out on any patience needed while shares work their way to multi-year highs, from where they’re only about 15% away from now.
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