Financial giant Charles Schwab stock is back in buy range on the strength of growth prospects. The discount broker is preparing to absorb TD Ameritrade customers, where they can continue to use the highly popular thinkorswim platform The IBD 50 member is today's pick for IBD 50 Stocks To Watch.
SCHW stock topped its 81.18 buy point off a cup-with-handle base on Nov. 22 but then dipped as the market declined. It bounced when the Federal Reverse reiterated its aggressive rate policy, telling the markets it will do whatever it takes to control inflation. Annual inflation slowed to 7.1% in November.
Schwab and other big brokers should benefit from the recently-passed Secure Act. A provision changes retirement savings and mandatory distribution rules, making it easier for Americans to build wealth in their senior years.
SCHW stock reentered its buy zone on Tuesday and is above its 50- and 200-day moving averages, according to MarketSmith.
The relative strength line is climbing once again and hitting 52-week highs, which is a great sign. Schwab was also a IBD Stock of the Day in mid-November.
On Dec. 14, Schwab said its total client assets for November fell 8% year-over-year to $7.32 trillion, up 5% from October. Client cash as a percentage of assets rose to 11.5% in November, compared with 12.2% in the prior month and 10.5% in November 2021.
Schwab Stock Higher Profit Margins
CFO Peter Crawford said last month that "even after we reach peak rates this cycle, we have the ability to continue expanding our net interest margin over the following years as our fixed investment portfolio rolls over."
The aggressive monetary policy by the Federal Reserve is expected to continue through at least the first half of 2023, although many investors are looking for the Fed to pivot lower.
In Q3, Schwab earnings per share of $1.10 grew 31% from last year. It also increased revenue 20% from a year ago, to $5.5 billion. That growth was led by a 44% increase in net interest revenue to $2.9 billion. Schwab's net interest margin grew 35 basis points from Q2, to 1.97%.
In its business update, Schwab indicated its net interest margin could reach 3% or more in 2025.
The Oct. 27 update also reaffirmed the outlook for "a higher level of capital return to shareholders" and robust client growth. In Q3, Schwab's active brokerage accounts increased 4% from a year ago, to $34 million.
Analysts surveyed by FactSet estimate the broker will earn $1.10 per share in the fourth quarter, unchanged from Q3, on revenue of $5.5 billion.
Schwab Set To Absorb Ameritrade Acquisition
Meanwhile, Schwab has told TD Ameritrade clients their accounts will be moved into the Schwab ecosystem, starting in 2023. It's a long-awaited development after the company bought TD Ameritrade in 2019. But until now, the two trading platforms operated separately.
That will change next year.
"We're nearing the point where two great firms become one and TD Ameritrade clients become Schwab clients," wrote Jonathan Craig, head of investor services, in a note to clients this week.
Schwab holds fourth place in IBD's Finance-Investment Bank/Brokers industry group, according to IBD Stock Checkup. It ranks behind other top-rated stocks like StoneX, Futu and Interactive Brokers. The group ranks No. 29 out of 197 industry groups.
It has a strong Composite Rating of 96, with a Relative Strength Rating of 86. An RS Rating above 80 is considered noteworthy for a stock.
The "C+" Accumulation/Distribution Rating is acceptable while its "A" SMR Rating shows the broker/bank's ability to notch sales and margin growth. Return on equity is also included in the SMR Rating.
Follow Michael Molinski on Twitter @IMmolinski
