Charles Schwab (NYSE:SCHW), commonly just known as Schwab, is catching a bid, and a relief rally is, quite possibly, just getting started. I am bullish on SCHW stock because the company’s major issues, including investment outflows from earlier this year, appear to be easing now.
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Charles Schwab is a well-known bank and investment broker that also offers advisory services. It’s not quite a “mega-bank,” but Schwab is known to be traditional, and it’s bigger than distressed regional banks like Silicon Valley Bank.
Yet, the troubles of U.S. regional banks sent many financial traders into a panic a few months ago. Thankfully, Schwab’s latest results suggest that not only is Schwab in good shape, but perhaps the nation’s distressed banking system will survive.
Charles Schwab Stock Soars Despite Declining Revenue
Is it possible for a stock to shoot higher even though the company just reported declining revenue and earnings? Yes, it’s definitely possible, and that’s exactly what’s happening with SCHW stock.
Charles Schwab stock is still down year-to-date, but that might change in the coming weeks, as the stock is currently up 12% in midday trading today. That’s quite unusual, as SCHW stock isn’t usually a fast mover.
Today’s rally might seem strange, given that Schwab reported second-quarter 2023 adjusted earnings of $0.75 per share, down 23% year-over-year. However, this result beat the consensus estimate of $0.71 cents per share.
Additionally, Schwab announced quarterly revenue of $4.66 billion, down 9% year-over-year. While that’s another decline, it’s also another Street beat since analysts expected revenue of $4.61 billion.
Maybe we should have seen this share-price rally coming, as Devin Ryan of JMP Securities had recently raised his rating on Charles Schwab stock from Market Perform to Outperform. Also, Barclays (NYSE:BCS) recently lifted its price target on SCHW stock from $55 to $62.
Even with all of that in mind, there must be something else going on. What could possibly prompt financial traders to boost the Schwab share price by 12%? The answer lies in a phenomenon known as “cash sorting,” which Schwab appears to be managing better than some folks expected.
Charles Schwab’s CEO Emphasizes Investment Inflows
Cash sorting, to put it very simply, refers to banking customers withdrawing their funds from investment accounts and placing them into CDs, money-market accounts, and other low-risk asset classes. As companies like Silicon Valley Bank came under pressure earlier this year, some investment bankers pulled their capital due to a sense of panic — and because CDs and money-market accounts have been offering unusually high interest rates.
Consequently, some financial traders worried that cash sorting and investment outflows, in general, would destroy Charles Schwab’s top and bottom-line results. Fortunately, as we discussed earlier, Schwab’s quarterly results weren’t as bad as the experts on Wall Street had anticipated.
Surely, it’s not mere happenstance that Charles Schwab CEO Walt Bettinger emphasized the lack of quarterly investment outflows. In Q2 2023, according to the chief executive, Schwab “gathered $52 billion in core net new assets – bringing year-to-date asset gathering to over $180 billion and keeping us squarely within our long-term organic growth range of 5% – 7%.”
Not only that, but Charles Schwab “attracted nearly 1 million new brokerage accounts and finished the period serving $8.02 trillion in total client assets across 34 million accounts” during the second quarter. To me, at least, that doesn’t sound like massive outflows of investment capital.
Is SCHW Stock a Buy, According to Analysts?
Turning to Wall Street, SCHW stock comes in as a Moderate Buy based on 12 Buys, two Holds, and two Sell ratings. The average Charles Schwab stock price target is $67.43, implying 2.6% upside potential.
If you’re wondering which analyst you should follow if you want to buy and sell SCHW stock, the most profitable analyst covering the stock (on a one-year timeframe) is Stephen Biggar of Argus Research, with an average return of 26.11% per rating and a 69% success rate.
Conclusion: Should You Consider SCHW Stock?
There’s a pretty good chance that analysts will end up revising their price targets on Charles Schwab stock soon. That’s not only because the stock is higher now but because the cash sorting problem didn’t wreak havoc on Schwab as much as some people thought it would.
There might even be broader implications to be drawn from Schwab’s expectation-beating results, as they could suggest that the U.S. banking system is fundamentally improving. Yet, whether we agree with that generalization or not, at least we can conclude that SCHW stock is on the right track and is worth considering now.
