Charles Schwab (SCHW)
I wrote the below about Charles Schwab (SCHW) on 9/21/20. This was when I was first getting into quality investing - so the logic & checklist isn’t as fleshed out as they are now.
That said, I’m proud of this one because the logic of this post holds up really well. This was at a time when Robinhood was popular and everyone was convinced that interest rates would never go up again.
I bought the stock at $35.14 and sold at $89.96 on 1/18/22 when I thought the valuation was stretched. I bought it below 2x book and sold it when it reached 4x book. I still think the company is excellent but I think the stock is still expensive so I haven’t dived back in.
Price/Book = 1.82x
Return on Equity = 14%
Earnings Yield = 6.67%
Debt/Equity = 38%
Charles Schwab has long been a financial industry powerhouse. With the merger with TD Ameritrade, it is going to become the dominant player in this market.
Schwab's origins are as a discount brokerage. They offered cheap commissions for DIY investors. Perception around the stock is that this is what Schwab's business still is.
The truth is that brokerage commissions were a trivial component of Schwab's business, which is why they were so quick to cut it to zero in an effort to clobber their competitors. They continue to make money on trading activity, via order flow. The financial media gets incensed about this, but I don't think anyone really cares.
They cut commissions to zero to clobber their competition, which is rapidly disappearing. By merging with TD Ameritrade, the only serious challenger to their business is Vanguard. The sheer scale gives them the ability to cut costs and offer services at a lower fee. In my mind, this is a moat. They're like Wal-Mart in 1990 taking on small mom and pop retailers, Clover, and Bradlee's.
The stock is cheap for a simple reason: interest rates are low and investors think that will last forever. When clients leave cash in a brokerage account, Schwab offers the client little interest, and then they invest that cash in short duration fixed income products. With interest rates low, that income is reduced. There are also jitters about the merger with TD, but I think that the merger is only going to strengthen their competitive position.
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