Buy The Dip In The Charles Schwab Corporation

Key Points

• Execs and analysts defend the Charles Schwab Company despite share plunge. 
• Business is insulated from risks that led to SVBs' demise. 
• Price action may fall in the near term, but this is a buying opportunity for long-term investors. 

Shares of The Charles Schwab Corporation NYSE: SCHW are falling along with the broader financial sector due to fallout from the SVB issue, but it is getting thrown out with the bathwater. This company may have some systemic risk to issues within the broader financial industry, but its model is far different than SVB, and its problems, if they can be called such, lay in other areas.

Regarding the business model, about 80% of the deposits at The Charles Schwab Corporation are FDIC insured, while it was estimated that roughly the same amount of SVBs business was uninsured. The salient point is that analysts are upgrading the stock due to the rapid decline in share prices, opening an opportunity for investors to buy the dip. 

The latest is from Citigroup NYSE: C, which upped the stock to Buy from Hold. They don’t see the risk of withdrawals or bank runs associated with SVBs downfall and trading at 15X its earnings; it is a value. They estimate the stock is down 30% from its historical valuation, which suggests that growth and multiple expansion are on the table. 

Morgan Stanley NYSE: MS is another recent supporter of the name, citing the new FOMC funding facility as beneficial. Morgan Stanley analysts have the stock pegged at Overweight with a $99 price target compared to Citigroup’s $78 and the Marketbeat.com consensus of $90. The $90 consensus is down a little on a YOY basis and has shown some volatility but is relatively flatter than not. Even the low price target of $60 offers about a 15% upside, with shares down another 10% from their recent peak. 

The Charles Schwab Company, A Victim Of Circumstance? 

The Charles Schwab Company’s decline began on March 9 when a report JPMorgan had brokered or attempted to broker a large block trade in SCHW shares. The trade, worth 8.5 million shares at a price between $73 and $74, came in tandem with growing uneasiness related to Silicon Valley Bank and Silvergate Bank, so met a market ready to sell. That was compounded by the subsequent collapse of SVB, which has the entire financial sector moving lower. 

Schwab execs have come out in defense of the company. According to them, the company is well-capitalized and has access to multiple short-term lending facilities. The company has access to about $400 billion in cash flow and borrowing capacity, which is ample to get through this rough patch. The company also reiterated its guidance, although the outlook is a bit shy of the Marketbeat.com analysts' consensus estimates. 

“All of these factors demonstrate that Schwab is well-positioned to navigate the current environment as we continue to serve clients and build the future of modern wealth management. And we applaud the efforts of our regulators to support depositors during this critical time, helping to bolster confidence across the American banking system,” said the company in its statement.

The Technical Outlook: The Charles Schwab Corporation Falls To Pandemic Low 

The price action in SCHW fell more than 35% this month alone and may fall further, but there are signs of buying at the new lows. If the market can sustain this level, consistent with the 2018/2019 highs, it can form a base and prepare for recovery. If not, this stock may continue lower and retest support at the $30 level.