04. The Charles Schwab Corporation (NYSE:SCHW)
Price Reaction after the Price Target Cut: -0.73 (-1.15%)
On January 18, Barclays analyst Benjamin Budish made significant adjustments to the evaluation of The Charles Schwab Corporation (NYSE:SCHW), a key player in the financial services industry. Budish lowered the price target from $68.00 to $64.00 while maintaining an “equal weight” rating on the stock. Following this revision, the closing bell on January 18 witnessed a notable negative price reaction, with The Charles Schwab Corporation (NYSE:SCHW) experiencing a decline of 1.15%. Despite the reduction in the price target, the decision to uphold an “equal weight” rating suggests a neutral stance, indicating that The Charles Schwab Corporation (NYSE:SCHW) is expected to perform in line with industry peers. The significant negative market response observed on January 18 adds depth to The Charles Schwab Corporation (NYSE:SCHW) ongoing narrative within the financial services industry.
Right Tail Capital stated the following regarding The Charles Schwab Corporation (NYSE:SCHW) in its fourth quarter 2023 investor letter:
“Some of Right Tail’s larger investment decisions this year involved moving on from an investment. Charlie would say don’t avoid mistakes because they are inevitable. Instead, focus on repeating what works.
Notably, I sold The Charles Schwab Corporation (NYSE:SCHW) in March. Now that some time has passed, I’ll share how I approached the decision. In March, Charles Schwab stock declined ~25% during the banking challenges that crippled First Republic Bank and Silicon Valley Bank. Schwab has some similarities in that it is a bank (investing idle cash in their customers’ accounts allows them to charge less for other products and services) and had invested in bonds during the low interest rate years that would be worth less if Schwab needed to liquidate today. Also, Schwab clients were leaving less cash in their accounts favoring higher interest alternatives that were a more expensive cost of funds for Schwab. However, Schwab had many positives relative to the troubled banks such as limited uninsured deposits and sticky assets. For example, investment advisors such as Right Tail who custody at Schwab have limited options. It would be a hassle (though quite doable) to switch to a different custodian (and I would absolutely make the change if I thought it was in the best interest of our investors). I carefully considered the pros and cons. Something had changed in that I had always considered Schwab to be a beneficiary of rising interest rates – now the company was rooting for lower rates in the intermediate term. I thought Schwab may have to raise capital to deal with their short-term liquidity challenges (they indirectly raised capital by pausing their stock repurchase program). I also thought regulators may ask more of Schwab as an important institution that no one wants to fail. Positively, I was still rooting for Schwab and thought they’d continue to be a blue chip brokerage firm that would likely keep taking share over time.
Ultimately, I felt my time and energy would be better spent trying to find the next great Right Tail investment than in trying to untangle Schwab. I sold the stock in the mid to high $50s and used the proceeds to add to our existing positions that I felt best about. I estimate that owning Schwab reduced our returns by less than 100 bps since inception and ~250 bps for 2023.”
