2023-05-30 01:02:17 ET
Summary
- Cash movement trends continue to improve.
- No reversal in falling Bank Deposit Account balances.
- Core Net New Assets Seasonally Weak Due to Tax Season.
- Valuations continue to be attractive.
- Insider purchases support long-term longs, but not IRR-maximizing investors focused on alpha.
Thesis Review
Q1 FY23 results and the constructive commentary on key metrics such as the net new purchased money market flows had led me to have a bullish view on Charles Schwab ( SCHW ). Since then, SCHW stock has returned +0.57%. However, this has lagged the market's return of S&P 500's ( SPY ) ( SPX ) +1.77%; a negative alpha of 1.2%. This may be due to a mixed bag of results in terms of key performance metrics; favorable momentum in a reduction of net new purchased money market fund flows were offset by a continued decline in bank deposit account balances and weaker than usual core net assets growth.
Whilst the long-term bullish case still seems intact, especially if one considers the flux of insider purchases, I believe the stock will go through a bit more time-correction before making decisive moves upwards. Hence, I am adopting a 'neutral/hold' stance at this juncture.
Cash movement trends continue to improve
In the company's 2023 Spring Business Update, management had noted that they were seeing "measurable slowing" in the cash movements of the net new purchased money market fund flows. The recent release of April data has confirmed the previous commentary as the figure fell sharply from $30 billion to $9 billion. In the chart above, I have estimated the situation as of May 12 2023 based on CFO Peter Crawford's reassuring comments in the Monthly Activity Highlights press release :
This trend has continued into May, with the month-to-date pace improving nearly 50% versus April . We remain confident that client cash realignment activity will abate during 2023
- Author's bolded highlights
This is a clear positive for the stock since it indicates a decelerating mix of flows into money market funds, which bear a higher interest cost to typical bank deposits.
No reversal in falling Bank Deposit Account balances
Bank deposit account balances is correlated to the interest revenue line in Charles Schwab's P&L. April 2023 continued to see a 4.2% decline although there is deceleration from the prior 2 months. Last time, I thought the chances of a reversion to the mean is increasing. I continue to hold this view but I get the sense that the market may be waiting to see a decisive improvement in this metric first to really make alpha-generating moves.
Core Net New Assets Seasonally Weak Due to Tax Season
Core net new assets (which exclude the lower fee mutual fund clearing and certificate of deposit flows) have been stagnant so far in CY23. April 2023 saw a sharp decline but this was expected due to tax season impacts. I continue to monitor this for signs of incremental growth as I suspect the price-action in the stock would react more favorably to these developments.
Valuations continue to be attractive
Charles Schwab is currently trading at a 1-yr forward P/E of 16.5x, which corresponds to a 24.5% discount to the 10-yr average 1-yr forward multiple of 21.8x. This discount margin of safety is not too different to what it was a month ago. However, the price action has not gone as per my expectations, which makes me think the market may be waiting for more evidence of operational metric turnaround.
Insider purchases support long-term longs
As the prices of US banking stocks started to collapse around March 13, 2023 amid the Silicon Valley Bank collapse, multiple insiders of Charles Schwab stepped in to aggressively buy their company's stock right from March 14 2023:
Altogether, insiders bought 140,844 shares worth $8.16 million at an average price of $57.93/share. Today, the price stands at $53.67; a modest 7.4% discount to the average buying cost of company insiders in March this year. I think insiders generally know the value of their own company's stock a lot better than we outsiders do. Hence, this is a clear bullish signal for the stock.
Takeaway
Charles Schwab's cash movements have decisively moved favorably in April in accordance to the heads-up management gave us in Q1 FY23 . Despite this, the stock has not moved as per my expectations. It is simply hanging around and whilst it is not materially moving down to lead to a loss in absolute return, it is losing alpha to the S&P 500 (my opportunity cost benchmark). I am left wondering whether the market is waiting for more evidence; perhaps signs of a reversal in the falling Bank Deposit Account balances or incremental growth in core net new assets.
Therefore, I think the decision on Charles Schwab depends a lot on the kind of investor one may be. I believe the opportunity remains attractive for long term investors who would have no issues tolerating a mild time-correction in the stock. Indeed, the current prices of $53.67/share provide an opportunity to get in at a 7.4% discount to insiders who decisively bought during the banking sector related crash in March 2023.
Personally, a purchase now does not suit my investing style as I have no issues buying later and later if it enables me to maximize my alpha IRR by minimizing the waiting time for an alpha-generating move. Until then, I would rather have my capital in the Vanguard S&P 500 ETF ( VOO ), where I can be assured of little to no loss in alpha.
Since I see no fat pitch here right now, I rate the stock a neutral/hold.
For further details see:
Charles Schwab: No Fat Pitch Here