To The Moon

Charles Schwab: This Is A Unique Opportunity To Be Greedy

gorodenkoff

Given the current situation in the financial markets, I believe $Charles Schwab(SCHW)$(NYSE:SCHW) offers a unique investment opportunity at a discounted valuation. Schwab is a diversified, multi-national financial services company with a huge client asset base, a strong (reaffirmed) liquidity position, andan attractive valuation on the drop. Charles Schwab's stock price has declined almost 30% since March 8, 2023 in the wake of a couple of bank failures that have rattled investors. I believe that Schwab has a very solid liquidity position and is not at risk. It's time to buy the fear!

Data by YCharts

SVB failure rattles markets… and creates an opportunity for investors to buy a deposit-strong, growing financial services company

The context of Silicon Valley Bank's failure has been addressed in multiple places now, and most readers will be well aware of thechain of events that has been set in motion by the SVB Financial Group (SIVB) shutdown last week. The only thing that I believe really matters for investors to know here is that the Fed effectively provided adeposit backstop guaranteelast weekend with its Bank Term Funding Program. This program allows financial institutions to pledge U.S. Treasuries and other assets such as mortgage-backed assets, as collateral for short-term cash to fund deposit withdrawals.

What I would like to focus more on is the unique buying opportunity that I see for Charles Schwab's shares. Charles Schwab, at its core, is a growing financial services firm that had more than $7T in assets at the end of FY 2022. The company has seen a surge in customer deposits, client assets, revenues, and net income in the last five years as well, in part aided by the Fed's easy money policies. Charles Schwab achieved record revenues and net income in FY 2022, just before the shutdown of Silicon Valley Bank caused new stress in the financial system.

Charles Schwab's key metrics all point in the right direction...

Source: Charles Schwab

The SVB shutdown, however, has changed investors' focus away from operating fundamentals and towards the liquidity side of Charles Schwab's business. While liquidity and deposit concerns have weighed on Charles Schwab's valuation since last week, I believe the brokerage has ample liquidity to fund any outflows that may occur. Additionally, the Fed's liquidity facility creates another cash pool for Charles Schwab in the unlikely event that it needs financial assistance. However, I don't believe this will be necessary.

Charles Schwab's CEO said earlier this week that the firmdidn't need additional liquidityand that it had more than $100B of cash flow stemming from bank balances, net new assets that are brought to the platform by new and existing clients and portfolio income. He also said in aCNBC interviewthat the brokerage was seeing significant deposit inflows right now.

Charles Schwab is a very strong financial services franchise in large part because the company has consistently been able to attract new client assets over time. Over the longer term, Charles Schwab has grown its net new assets at a rate of between 5% and 7% annually. In FY 2022, Charles Schwab received $428B in net new assets, mostly from its existing client base. This strength in deposit/asset gathering is a huge asset for Charles Schwab during times of crisis, in my opinion.

Source: Charles Schwab

String of insider buys creates confidence

It is always a demonstration of confidence if management buys the stock of its company, and this is especially true when management buys shares during times of heightened volatility and fear. A number of directors and officers at Charles Schwab, including the company's CEO, took advantage of the price drop this week andpurchased81,757 shares of the financial services company. A total of 50,000 shares were bought by Charles Schwab's CEO.

Source: Nasdaq

Charles Schwab's valuation implies a large fear discount

I have not owned Charles Schwab before, and only this week entered into the financial sector by buying beaten-down community banks such as First Republic Bank (FRC) and PacWest Bancorp (PACW), which have seen massive declines in their price-to-book ratios. Since pure panic has taken over the pricing of financial stocks in recent days, I believe that financial institutions with strong franchises and liquidity, like Charles Schwab, actually offer investors downside protection in a market controlled by fear. Charles Schwab's shares are currently valued at a P/B ratio of 3.7 X and a P/E ratio of 10.4 X. Other brokerage firms have also seen large valuation draw-downs this week, including Interactive Brokers Group (IBKR). At just 10 X forward earnings, I believe investors are getting a really good deal considering Charles Schwab's strong business trends before last week's catalyst event.

Data by YCharts

Risks with Schwab

If more banks fail and stress levels in the financial industry rise, then the market situation may get a whole lot worse, at least in the short term. However, I believe that Charles Schwab has a very strong financial franchise and has demonstrated its ability to attract new assets. What would change my mind about Charles Schwab is if the company unexpectedly saw huge deposit outflows and the market experienced a complete financial panic.

Final thoughts

I believe there is a unique investment opportunity here with The Charles Schwab Corporation because the financial services company has demonstrated over time that it can attract a considerable amount of new client assets. The firm also has a strong brand name and a solid liquidity position… all of which should help Charles Schwab navigate a difficult and unstable market.

Additionally, directors and officers at the brokerage, including the CEO himself, bought a ton of shares on Monday when the financial sector went into a tailspin. Considering that the near-30% valuation decline since last Wednesday is not really deserved based on operational performance, I believe there is a chance here for investors to take advantage of the turmoil in the financial market. Charles Schwab's shares are surely not expensive at a P/E ratio of 10 X.

With $100B in liquidity from various sources and the Fed supporting the market with a cash facility to stem the outflow of deposits, Charles Schwab could revalue to the upside sooner than investors think!

Source: Seeking Alpha