An Undervalued Stock That Investors Are IgnoringJul 22, 2022
Earnings season has been off to a shaky start when financials like JP Morgan and Morgan Stanley came in below what analysts were expecting last week. But then stocks like Netflix mildly outperformed expectations — so it’s still difficult to know where we are in this overall bear market.
What's NOT in doubt, however, is how high inflation is. This is why our analysts were surprised to see very little talk about Charles Schwab’s earnings call on Monday.
Schwab is performing comparatively well in this market while getting a strong lift from inflationary pressure.
Because of their solid revenue growth and expectations that inflation won’t suddenly drastically abate — this is a solid moment to get some good value out of a position in Charles Schwab.
Let’s get into it.👇
Schwab ($SCHW) Overview:
Schwab is a classic lending brokerage. But before you dismiss this as a sleepy pick, they're actually a financial powerhouse that’s been empowering investors for decades.
They make revenue off of investments, empowering their customers to trade and financial advisory services.
There are really only two paths for an investment house like Schwab in a market like ours:
Bear sentiment drives trading volume down, which depresses revenue.
Inflation drives up fees and therefore revenue for Schwab — bringing their valuation up
Wildly — Schwab has managed to pull off the second option and the opposite of the first. Daily trading volume at Schwab is up 3% YoY while revenue overall is also on the rise.
Compare that to Robinhood which has seen volumes & revenues plummet and it shows the strength of its core customers.
Schwab customers are wealthier and more experienced, therefore in this market, they're actually trading more as they see good money-making opportunities.
Schwab’s Bear Hug:
Usually, a 3% increase in trading volume is standard. But let’s think about the context here. That’s a YoY increase from Q2 2021 to Q2 2022.
Q2 2021 was one of the brightest spots of the post-covid bull run. People were still relatively flush with cash, and that cash was flooding the market.
Q2 2021 into Q3 was the summer of trading. There’s no other way to describe it.
Meanwhile, Q2 2022 had some of the deepest bear sentiment we’ve experienced since 2008 (and kind of April 2020–but that wasn’t bear sentiment so much as it was the apocalypse).
People were pulling money into safer assets all over the place. And yet, here we are looking at a 3% increase in trading volume at Schwab and a 13% increase in revenue YoY. These numbers are decent for an institution like Schwab — but WILD in context.
Outside of the strength this speaks to their overall business, it also comes as a strong signal for how retail investors SHOULD be acting in this environment.
Inflation Raises Revenues Overall:
But it’s that rise in overall revenue that has us bullish on Schwab too.
A lot of that increase can be contributed to overall inflation. But unlike JP Morgan and Morgan Stanley — Schwab doesn’t need to be defensive and worried about defaults while they’re taking in record revenues.
The upside for Schwab won’t be massive — but it will be significant even if this downturn pushes harder into the red.
And if you look to our Visa analysis — you’ll see how the composition of inflation disproportionately affects consumers who are outside of Schwab’s TAM.
Demand for Schwab’s services will remain flat even during a full-blown recession.
This will further be bolstered as Schwab shifts to more fee-based products. Schwab’s fee-based services (like their robo-advisor) are easy to adjust on the cost side and therefore a safer revenue stream.
All-in-all, Schwab is a solid finance pick looking for decent growth after their valuation got a little oversold during this Q2 selloff.
In the future, we’re looking for more information about regulations for companies that use payment-for-order-flow as a revenue stream as well as information on how many customers are moving cash off-platform.
If those two areas stay strong — Schwab will, at a bear minimum, outperform the market as we push through this period of uncertainty!
They're not the sexiest pick in the world, but the boring picks are what is outperforming in these conditions.
Price Target: $83 (34% upside)
Current Price: $62
Target Date: Q2 2023
Risk/Reward: Medium /Medium-High
Market Cap: $119B
Dividend Yield: 1.27%