02. The Charles Schwab Corporation (NYSE:SCHW)
Number of Hedge Fund Holders: 74
On May 15, Raymond James analyst Patrick O’Shaughnessy upgraded The Charles Schwab Corporation (NYSE:SCHW) from Market Perform to Outperform and set a price target of $63. The analyst points out that recent data suggest a tapering of client cash outflows at The Charles Schwab Corporation (NYSE:SCHW), which is expected to stabilize the company’s balance sheet and net interest margin. The firm believes that The Charles Schwab Corporation (NYSE:SCHW) deposit balances will begin to stabilize in the third quarter. While a stricter regulatory environment may continue to impact the company’s shares for some time, the firm believes that any incremental risk to Schwab’s earnings power will likely be limited. Additionally, the firm highlights that The Charles Schwab Corporation (NYSE:SCHW) has minimal credit risk and possesses an attractive core growth story that remains unaffected by recent macroeconomic events.
RiverPark Large Growth Fund made the following comment about The Charles Schwab Corporation (NYSE:SCHW) in its Q1 2023 investor letter:
“The Charles Schwab Corporation (NYSE:SCHW): SCHW shares were our top detractor for the quarter as bank stocks sold off aggressively following the failures of Silicon Valley Bank and Signature Bank. Despite the bulk of Schwab’s $7 trillion of assets being in the brokerage business, the company does have a large deposit base on which it earns net interest income. While Schwab has seen asset growth increase as depositors look for safety, the company has seen persistent cash sorting (depositors moving cash from deposits to money market funds to generate higher yields). This sorting has two negative consequences: first, it reduces the firm’s profitability because Schwab earns more in net interest income on assets on deposit than it does on management fees from money market funds, and second, it forces Schwab to sell assets held by its bank subsidiary to fund the cash transfers into money market funds. Because of the recent rapid rise in interest rates, these asset sales could cause Schwab to realize trading losses. We think this latter scenario is unlikely for two reasons: first, following historical patterns from past cycles, we believe the cash sorting trend will slow in the coming months, and second, Schwab has enough available liquidity from other sources to fund nearly 100% of its deposit base without selling marked-down securities.
Schwab and TD Ameritrade (which Schwab acquired in October 2020) have been the leading share gainers in the discount brokerage industry over the last decade, with both generating substantial organic asset growth while also growing operating margins and remaining amongst the price leaders on all products. With these two businesses now combined, revenue and expense synergies should accelerate in 2023, and we believe the company will be in an even stronger position to gather assets and drive long-term margins and free cash flow in the years to come.”
