Tag Archives: NYSE:SCHW

Charles Schwab: Zacks’ Bull of the Day Play

The Charles Schwab Corporation (SCHWFree Report) is a $55 billion investment services firm with $2.73 trillion in client assets. The firm’s evolution from a discount broker to a full-service wealth management institution explains that enormous asset base.

Schwab looks poised for 26% EPS growth this year based on rising analysts earnings estimates. And the 15.6% revenue growth estimate fueling those projected profits is probably a big part of the reason shares are pushing highs not seen since the year 2000.

Wall Street analysts are forecasting that the broker to hit a record $8.66 billion on the top line this year. That math is driven by three factors: interest rates, deregulation, and the natural climb in trading accounts and volume in a strong bull market.

Financial Sector Takes Flight

The financial sector definitely got a face lift since the election for two obvious reasons. First, the yield curve steepened as long-term Treasuries sold off fast and furious.

And this rise in interest rates is generally good for banks and other financial institutions who benefit from a greater net interest margin on their borrowing and lending activities.

Second, there was the overwhelming sense that the new administration would do serious damage to financial regulations like Dodd-Frank, thus clearing the way for unencumbered dealings between investment banking and commercial banking, as well as the removal of other shackles.

Since the election, while the broad S&P 500 index is up just over 6%, the financial sector as represented by the SPDR ETF (XLFFree Report) is up nearly 18%.

Banks big and small have lead the charge for the most part for the two benefits mentioned.

Brokers Make Bank

But did you know that investment broker-dealers also benefit from rising yields? That’s because in addition to income from stock lending and margin interest, they hold lots of assets in customer cash balances that they can earn interest on every night.

For the brokers, it also helps that the strong bull market is making new all-time highs and driving more stock trading commissions and newly funded accounts.

For all these reasons, Wall Street earnings estimates have been rising for brokers like Schwab and TD Ameritrade (AMTDFree Report) , as well as for investment banks like Goldman Sachs (GSFree Report) and Morgan Stanley (MSFree Report) . The industry group comprising all these names has climbed to #8 out of 265 industry groups.

The Economy and Inflation Expectations

The big underlying drivers for the big move in interest rates — the 10-year Treasury yield surged from 1.8% to 2.6% in just 5 weeks after the election — was a combination of the building economic momentum of the second half of 2016 with renewed optimism about the GOP sweep of the Presidency as well as regaining both houses of Congress.

After the election, it was as if the inflation genie had suddenly been released after years in captivity.

So the perception among financial elites is that all kinds of prices will continue rising from Wall Street to Main Street, thereby fueling inflation and the revenues and profits of financial intermediaries.

Value investor Mario Gabelli, founder and CEO of Gamco Investors, shared his top stock picks and market views in an exclusive interview with CNBC’s Scott Wapner on Tuesday January 10.

Specifically commenting on Goldman Sachs, he said “I don’t see any reason to not think it will do quite well over the next five years. The investment banks and commercial banks … fundamentals are terrific. The underpinnings are great.”

Gabelli believes the financial sector will continue to perform well in 2017 as economic growth improves, wages rise, and lending increases.

All of these factors create solid conditions for brokers going forward. Your game plan should be to buy solid Zacks Rank financial stocks on the dips.

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Charles Schwab: Zacks’ Bull of the Day Play

With the prospect of higher interest rates increasing each day, investors are slowly starting to position their portfolios in order to benefit from the likely trend. This results in a focus on the financial sector, since many banks benefit from a higher interest rate differential, as they make money off of the spread between the long and short term rates.

However, one area that investors often forget to think about as a rising rate beneficiary is that of the investment broker space. Investment brokers take uninvested capital in client accounts and use it to purchase a variety of ultra short-term securities. Right now, these securities earn a very low yield, but obviously as rates increase the income goes up as well. This can actually make a substantial portion of a broker’s income, so higher rates are often seen as crucial to better earnings for companies in this sector.

But with rates slowly on the rise, optimism is definitely in the air for this corner of the market. That is part of the reason why the sector has a top 20% industry rank, and why just one of nearly two dozen companies has a ‘strong sell’ rank right now. On the other side of the coin, there are about 10 companies in the segment that have a Zacks Rank of ‘buy’ or better, so how do you decide where to place your bets in this promising corner of the market?

Talk to Chuck

Well, one company that should definitely be on your radar in this market is Charles Schwab (SCHWFree Report) . The company was actually just upgraded into ‘Strong Buy’ territory within the past week so it could be an excellent time to jump in to this top stock.

This is especially true given the recent earnings estimate revision activity for SCHW, as analysts have been racing to upgrade their estimates for the company. In just the past thirty days, we have seen five estimates go higher for the current quarter, compared to zero lower. And for the current year, we have seen ten estimates go higher in the past month, and three higher in just the past week. Once again, this is compared to zero lower.

These rising estimates are now baking in an EPS growth rate of over 33% for both the current quarter and the current year, which is pretty substantial given SCHW’s size. Meanwhile analysts are also anticipating a double digit percentage increase in revenues as well so it appears as though Schwab is on a nice momentum path.

But before you start to worry about SCHW living up to analyst expectations, consider their recent performances in earnings season. The company has only missed estimates once since the summer of 2013, and it is riding a streak of six straight beats.

SCHWAB(CHAS) Price, Consensus and EPS Surprise

SCHWAB(CHAS) Price, Consensus and EPS Surprise | SCHWAB(CHAS) Quote

Bottom Line

Clearly, this is a top-notch company that deserves your consideration heading into 2017. The overall sector is promising, the rate environment favors brokers, and we have seen some M&A activity as well.

So, trust in the rising earnings estimates—as well as the unanimous positon among analysts that the picture is getting better—and consider this stock for your portfolio. It just rose to strong buy territory and is coming off another earnings beat, so now could definitely be the time to give it a closer look.

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SCHWAB(CHAS) (SCHW) – FREE report >>