Shares of The Charles Schwab Corporation (SCHW) are trading higher by more than one point in Thursday's session after the brokerage giant beat third quarter 2020 profit estimates by $0.04 and reported in-line revenue. Even so, revenue fell 9.7% year over year to $2.45 billion, highlighting weak investment income and market share losses to a new generation of broker-dealers catering to the needs of younger investors. Results were also undermined by the recently completed TD Ameritrade acquisition.

Key Takeaways

  • Charles Schwab dropped commissions to zero in October 2019 to compete with start-ups focused on younger investors.
  • Low interest rates are undermining investment income and mortgage portfolio performance.
  • The stock has been stuck in a downtrend for more than two years.

The company completed the TD Ameritrade acquisition just two weeks ago, reducing the number of top-tier U.S. broker-dealers. However, upstarts like Robinhood, Wealthfront, and Betterment are capturing the imagination and pocketbooks of younger demographics, marking a paradigm shift that could last for generations. Charles Schwab apparently saw the "writing on the wall" in October 2019, sending shock waves through the industry when it dropped trade commissions to zero.

Schwab CFO Peter Crawford noted that August new accounts and core net new assets were "among the highest we've seen for a summer month in recent years." However, interest rate compression has taken a toll on income, while Schwab's mortgage portfolio has suffered due to greater-than-expected prepayments. Credit Suisse analysts acknowledged these headwinds and the impact of so-called "Robinhood traders" on Wednesday, adding 13% to 2022 earnings per share (EPS) estimates in recognition of the acquisition but maintaining a "Neutral" rating.

Wall Street consensus matches Credit Suisse's growing caution, with a combined "Hold" rating based upon just one "Buy," seven "Hold," and no "Sell" recommendations. Price targets currently range from a low of $37 to a Street-high $51, while the stock is trading just a buck above the low target on Thursday morning. This humble placement highlights low expectations for Charles Schwab performance through the first half of 2021.

Investment income is income that comes from interest payments, dividendscapital gains collected upon the sale of a security or other assets, and any other profit made through an investment vehicle.

Charles Schwab Long-Term Chart (2000 – 2020)

Chart showing the share price performance of The Charles Schwab Corporation (SCHW)
TradingView.com 

Charles Schwab stock topped out at $51.69 after a multi-year uptrend in 1999, marking a high that wasn't challenged for the next 17 years. It sold off into the single digits in the first quarter of 2003 and turned higher, recouping about half of the bear market losses into 2008. The stock failed to bounce strongly after bottoming out in 2009, yielding a second test that ended at a six-year low in 2011. Strong-handed buyers then jumped in, generating an uptick that mounted 2008 resistance in 2014.

Price action completed a 100% retracement into the 1999 high in 2018, setting off a breakout just above $60, followed by a failure swing that reinforced resistance in the low $50s. The stock has carved a series of lower highs and lower lows since that time, breaking 50-month exponential moving average (EMA) support in March 2020. It failed an attempt to remount this level in June and is trading about two points below the barrier on Thursday. This doesn't bode well for higher prices into year end.

Strong hands is a colloquial term that can refer to well-financed speculators or futures traders who wish to take delivery of the underlying asset.

The Bottom Line

Charles Schwab stock has entered a secular downtrend despite record-breaking account growth, with multiple headwinds weighing on profits.

Disclosure: The author has family accounts at Charles Schwab but held no equity positions at the time of publication.