By Andrew Welsch
Shares of Charles Schwab have had a rough two years but the stock's fortunes could turn around in 2025, says KBW stock analyst Kyle Voigt. He picked Schwab and LPL Financial as his two top retail brokerage picks for next year.
With regard to Schwab, Voigt sees several potential catalysts for the company, including an opportunity to pay down short-term debt that has weighed on the stock.
As for LPL, it is completing its latest big acquisition and its new leadership is focused on margin expansion, two points in its favor, according to Voigt.
He raised his 2025 earnings estimate for LPL to $20.43 from $19.64, a 4% increase, according to his Dec. 20 research note. He also raised his 2025 estimate for Schwab to $4.32 from $3.90, an 11% increase.
Both Schwab and LPL are giant wealth management companies. Schwab has more than $10 trillion in assets, split between retail investors and independent financial advisors. LPL has approximately $1.7 trillion in brokerage and advisory assets and more than 28,000 financial advisors, most of whom operate as independent contractors and use LPL for technology, asset management, and other services.
Schwab has struggled in recent years because of cash-sorting, a process by which customers move cash from low-paying (but profitable) sweep accounts to higher yielding options. That forced Schwab to rely on short-term borrowings when deposit outflows exceeded its cash on hand, thus weighing on earnings.
Cash-sorting has abated this year and Schwab could pay down more of its short-term borrowings next year -- one of several potential catalysts Voigt sees for the stock. Other possible tailwinds include Schwab hitting its 2025-exit net interest margin target and returning to stock repurchases in the second half of 2025, he says.
Schwab's stock is up 7.3% this year compared with a 25% gain for the S&P 500.
Cash sorting has bedeviled other wealth management and brokerage firms. But recent cash-sorting data shows broad-based stabilization, Voigt says. "With the Fed cutting again earlier this week (and our expectation for 2 more cuts next year in our model), we believe sweep cash balances have already troughed for this cycle and feel more bullish on sweep cash growth over the next year," he says.
Wealth management firms and brokerages should broadly benefit from equity market appreciation and higher AUM fees. Some of those benefits are "clearly baked into the market and current P/E multiples," he writes. "However, we believe the group could still perform well."
LPL has been a strong performer in the wealth management and brokerage industry. Shares are up 44% this year. That's despite LPL's board of directors terminating its CEO and appointing Chief Growth Officer Rich Steinmeier as his replacement in October. Voigt says he likes the shift in tone from management around driving margin expansion into 2025 and beyond
Separately, Voigt says that while brokerage firm Robinhood has rode a wave of investor enthusiasm this year, he's cautious on the stock. Retail trading activity surged this year partly due to strong returns, he says. "As we saw in late-2020 and 2021, retail activity -- in both trading activity and margin levels -- follows price performance," he writes. While this could last into 2025, "The macro narrative and financial conditions (including 20%+ annualized market returns) can't last forever, and hence we view this as close to a cyclical peak for trading activity."
Voigt raised his 2025 earnings estimate for Robinhood to $0.89 from $0.55, a 62% increase. Shares of Robinhood are up 196% this year.
Write to Andrew Welsch at andrew.welsch@barrons.com
This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.
(END) Dow Jones Newswires
December 23, 2024 13:10 ET (18:10 GMT)
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