3 Reasons to Buy Charles Schwab Stock Right Now
Brokerage giant Charles Schwab's (SCHW) - Get Report has been performing well recently.
The stock has gained 12% over the last month, while the broader stock market has remained essentially flat. Add to that a recent dividend announcement and prospects are looking bright for this $40 billion dollar heavyweight.
Here are three reasons why Charles Schwab is a stock you should own, especially in this choppy market.
1) Rock-Steady Performance
It's not just that hedge fund guru George Soros bought a stake in the second quarter. (Everybody knows Soros moves in and out of stocks.) It's about the fundamentals, which are looking clean and sharp for Schwab.
When it reported third-quarter earnings on Oct. 15, Schwab met analysts' estimates, as net income jumped 17% year over year. New retail brokerage accounts saw a rise of 12% year over year. Total accounts were up 1%.
Net interest revenue came in at $635 million vs. $573 million a year earlier. Trading revenue also showed growth. And 2016 is expected to be solid. According to analyst estimates compiled by Yahoo Finance, EPS is expected to grow more than 32% next year.
In fact, the company appears to be on a high-growth path. Consider this: In the last five years it grew EPS by 15.3%. The next five years will probably witness 21.7% growth. This expected growth is double the industry average for the next five years.
Even during down markets, the company has shown an amazing stability in terms of net margin, net income and operating income, all of which have risen for the past three- and five-year periods.
2) The Ability to Leverage the Imminent Rise in U.S. Interest Rates
To understand why Charles Schwab will do even better in 2016 than it has in the past, you need to understand how it can leverage any rise in U.S. interest rates.
Low interest rates have weighed on Charles Schwab's revenues and profits. But the Federal Reserve is indicating that a rate hike is coming soon, which would yield a positive impact on the company. Brokerage firms tend to benefit when rate rise, because higher rates typically coincide with periods of market robustness and investor enthusiasm.
3) Moving With the Times to Become More Than Just a Discount Broker
Charles Schwab's business is not merely limited to discount brokerage services anymore. It's realigning in tandem with the market's evolution. Schwab has been aggressively marketing accounts that charge fees tied to the value of client portfolios. This is hugely different from the way traditional commission accounts operate.
Through its operating subsidiaries, Charles Schwab provides a full range of services: wealth management, securities brokerage, banking, money management and financial advisory capabilities to individual investors and independent investment advisers.
The exchange-traded-funds business is a good example of how the company has learned to keep pace with change. Ahead of many of its peers, the company debuted its first ETFs just six years ago, and as the third-quarter report card shows, ETF assets in custody at Schwab went up 10% year over year to $244 billion.
In the midst of heightened economic uncertainty and market volatility, the company's results and balance sheet indicate its strength and tenacity. The company's banking subsidiary, Charles Schwab Bank (member FDIC), provides banking and lending services and products and possesses balance sheet assets worth $128.7 billion.
At a forward price-to-earnings ratio of 23.3, the company is getting premium valuations compared to rival TD Ameritrade (AMTD) - Get Report because of faster growth expectations. Although Charles Schwab is expected to beat Ameritrade in EPS growth in 2016, sales growth for Schwab at nearly 16% will be much higher than the 11.7% estimate for its rival.
Charles Schwab is now on a golden run; the stock is a must-buy right now.
Meanwhile, click here for a list of dangerous stocks that you should sell.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.