Case Study: Charles Scwhab (SCHW) stock according to high performing analysts
Key Points
Performance
Charles Scwhab shares fell by 7.36% this week. This pushed their year-to-date performance down to -39.77%. This compares poorly to the S&P 500 which is up by 7.34% on a year-to-date basis thus far.
Event & Impact
Higher interest rates and a slowing economy continue to damage financial stocks. The unprecedented pace of rising rates has resulted in billions of unrealized losses on the balance sheets of financial institutions like Charles Schwab. Furthermore, investors moving money from bank accounts into money market funds (a process referred to as “money sorting”) is hurting banks like SCHW’s ability to produce high margins and profits.
Noteworthy News:
Charles Schwab carries a significant amount of unrealized losses on its balance sheet, which has damaged the sentiment surrounding its shares. Investors worry that SCHW shares will follow a similar path to the two regional banks that have failed recently; however, this week several credible authors/analysts pointed out that SCHW’s liquidity is much higher and the comparison to regional banks is not a fair apples-to-apples situation.
Nobias Insights
63% of recent articles published by credible authors focused on SCHW shares offer a “Bullish” bias. 1 out of the 1 credible Wall Street analysts who cover Schwab believe shares are likely to fall in value. The price target being applied to SCHW shares by this credible analyst is $65.00, which implies upside potential of approximately 31.7% relative to the stock’s current share price of $49.35.
Bullish Take Dividend Sensei, a Nobias 4-star rated author, stated, “Anyone who tells you, Schwab, is the next Lehman is either ignorant of the facts, a fool (who knows the facts but ignores them), or trying to sell you something (possibly all three).”
Bearish Take Growth at a Good Price, a Nobias 4-star rated author, stated, “Recently, OPEC decided to cut output, which caused oil futures to spike 5% in a single day. This naturally got investors worried about more rate hikes, which in Schwab's case would be troubling, as it is sitting on a massive amount of unrealized securities losses.”
SCHW Apr 2023
Regional bank failures have spooked investors in 2023. The S&P 500 is up 7.3% on the year; however, the financial sector is the biggest laggard, down by 6.66% during this same period of time. And within the sector there are stocks that have plummeted much further, largely due to fears of higher interest rates, unrealized losses on their balance sheets, the threat of more bank runs, and ultimately, fear of further failures.
One such stock is Charles Schwab (SCHW) which is down by 39.8% thus far during 2023. For years, this was a top performer for investors. Even with the stock’s -40% returns during recent months in mind, over the last decade, SCHW shares have provided investors with price returns of 185.6%. And, looking at recent reports published by credible authors and analysts, it appears that this long-term bullish sentiment remains intact.
Bearish Nobias Credible Analysts Opinions:
Growth at a Good Price, a Nobias 4-star rated author, put a spotlight on the stock’s most recent downward move in a Seeking Alpha article, stating, “Recently, OPEC decided to cut output, which caused oil futures to spike 5% in a single day. This naturally got investors worried about more rate hikes, which in Schwab's case would be troubling, as it is sitting on a massive amount of unrealized securities losses.”
Regarding Schwab’s business operations, the author said, “It reports $12.3 billion in losses in its financial statements, an amount that gets counted as equity. It also discloses $15 billion in losses on held to maturity securities; those aren't considered part of equity, but do affect liquidity. Further, Schwab has been reclassifying securities from available for sale ("AFS") to held to maturity ("HFS") in recent quarters, a behavior typical of the banks that failed in March.”
“Basically,” they continued, “Schwab actually has $27.3 billion in losses rather than the claimed $12.3 billion. The AFS securities are already reported at fair value, but the HTM losses aren't. If those securities were reported at fair value they'd reduce Schwab's $36 billion in shareholder's equity to $21 billion.”
“These figures all look pretty alarming,” Growth at a Good Price stated. “However,” they added, “the way the "unrealized losses" discourse played out in the media after Silicon Valley Bank collapsed was a little misleading.”
The author went on to describe the mechanics of a bank run, writing, “Basically, when a bank run happens, you have to start selling securities, because your cash position gets whittled down to $0. Once you start selling, unrealized losses transform into realized losses. If your unrealized loss is big enough, it can result in you failing to pay off your depositors.”
Looking at the chances of this happening to Schwab, the author wrote, “Schwab has $346.1 billion in very liquid assets if everything is adjusted down to fair value. Against this, we have $515.1 billion in liabilities. So, Schwab's liquidity covers 67% of all liabilities. It also covers a whopping 94.6% of deposits, which is an unheard of figure for more conventional banks.”
With this in mind, the author concluded, “The bottom line about Charles Schwab is that it's a fine company that has great liquidity. It's a buy at some price, it's just not clear that the current price is there just yet. Most likely, Schwab's excellent 2022 earnings growth won't continue into 2023.” “For me it's just a hold,” Growth at a Good Price said.
Bullish Nobias Credible Analysts Opinions:
Dividend Sensei, a Nobias 4-star rated author, offered a more bullish opinion on SCHW shares in a recent article,, calling it a stock that could “triple in 3 years”. Regarding the rumors of Schwab’s failure and the company being grouped up with smaller regional banks that have struggled as of late, Dividend Sensei wrote, “Anyone who tells you, Schwab, is the next Lehman is either ignorant of the facts, a fool (who knows the facts but ignores them), or trying to sell you something (possibly all three).”They continued, “Schwab's collapse isn't because Wall Street is worried about a run on Schwab. It has $71 billion in cash and $152 billion in liquidity vs. $392 billion in deposits.”
Like Growth at a Good Price, Dividend Sensei broke down Scwhab’s balance sheet and came to the conclusion that the company’s liquidity position is strong. Looking at Schwab’s financial metrics, the author focused on SCHW’s liquidity, stating that the company has:
$71 billion in cash
$16 billion short-term credit revolver
$65 billion long-term credit revolver
$200 billion in bonds it can borrow against from the Fed
$352 billion in total liquidity
Furthermore, they said, “So if 90% of people with a Schwab bank account wanted their money today, Schwab could give it to them. Schwab is NOT going to go bust like SVB or Signature. [referring to the two regional banks that have failed in recent weeks]”
Driving home their point, Dividend Sensei said: “Rating agencies estimate the chance of Schwab failing in the next 30 years at about 1 in 152. For context, Goldman [Sachs] estimates that the chance of nuclear war with Russia is about 2.5% or 1 in 40.
In other words, the chance of Schwab failing is about 4X smaller than a nuclear apocalypse.”
But, they did mention a specific headwind that the company faces. Dividend Sensei wrote, “Rather the trouble for Schwab is what management calls "money sorting."’They continued, “Money sorting just means that Schwab customers are moving money from checking accounts or other low-interest-rate accounts to higher-yielding savings, money market, or CD accounts.”
“Schwab generates about 67% of its income from net interest income on deposits, so cash sorting is a real potential headwind for it,” Dividend Sensei said. “Schwab faces a new headwind of higher costs of capital in the future, at least compared to the last 15 years,” they added. But, overall, the author was clear that the stock’s valuation looks attractive. They wrote, “Those higher deposit costs are expected to be no worse than what it faced from 2000 to 2008 when it was growing at 28% and trading at an average PE of 28.”
“Today,” Dividend Sensei said, “SCHW trades at 12.5X, a 50% discount.” And with that discount in mind, they believe shares are a bargain. “There is no question that Schwab will survive and grow in the future, the only question is how fast,” the author stated.
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
“But,” they concluded, “unless you think that Schwab will grow slower than 2% in the future, buying it today is likely a prudent decision.”
Overall bias of Nobias Credible Analysts and Bloggers:
Overall, 63% of recent articles written by the credible authors that Nobias tracks have expressed a “Bullish” bias towards SCHW shares. We’re seeing this same bullish lean by the credible analysts that we track when it comes to Schwab.
According to the Fly of the Wall, “Keefe Bruyette analyst Kyle Voigt lowered the firm's price target on Charles Schwab to $65 from $89 and keeps an outperform rating on the shares. The analyst acknowledges the "real risks" to Schwab's near-term earnings outlook and visibility, but thinks the selloff is now overdone. Consensus estimates need to decline significantly, but the stock "has now become compelling at current levels," the analyst tells investors in a research note. ” Voigt is a Nobias 4-star rated Wall Street analyst.
Voigt is the only credible analyst that Nobias tracks who covers SCHW shares, and despite his recent downgrade, his $65.00 share price target still represents significant upside to the stock’s current share price of $49.35. If Voigt’s valuation is accurate, SCHW shares offer investors an upside potential of approximately 31.7%.
Disclosure: As of 4/8/2023, Nicholas Ward has no SCHW position. Nicholas Ward wrote this article for Nobias at their request with the intention of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
Additional disclosure: All content is published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The information offered is impersonal and not tailored to the investment needs of any specific person.
Disclaimer: The Nobias star rating is based on past performance results and is not an indicator of future results. These past performance returns do not represent returns that any investor actually earned. Assumptions made include the ability to purchase the stocks recommended by the author under liquid markets where the transaction would be at the market price for the day. In reality, loss in liquidity may have a material impact on the returns that actually may have been earned. Further, returns are calculated without any including transaction costs, management fees, performance fees or expenses, or reinvestment of dividends and other income. This information is provided for illustrative purposes only.