Charles Schwab (NYSE: SCHW) Moves To Within Touching Distance Of All Time Highs

With yesterday’s closing bell, shares of Charles Schwab (NYSE: SCHW) finished at their highest level in two years and look to be on course to close out a phenomenal year. They’re now up a full 80% from the lows of Q1 and only 18% away from their all time highs, set back in 2018.

The massive growth seen in the number of young retail traders this year has been a silver lining on the coronavirus cloud for retail brokers like Schwab. Having made commission-free trading the new normal last year, they’ve been one of the go-to names in the industry for new traders looking to get involved in the raging bull market that we’ve seen this past spring and summer. Having only acquired another big brokerage player, TD Ameritrade, this time last year, Schwab has been well-positioned to capitalize on the growth.

Their total client assets increased 34% in the month of October alone, and are only a few million shy of crossing the $6 trillion mark. For all that though, the company has struggled to grow the bottom line this year. October’s Q2 earnings report had EPS in the black but revenue was down 9% on the year. Perhaps the sudden switch to commission-free trading is still being made up for across the business. However, Wall Street certainly hasn’t been slow though in backing the company to figure it out and get back to the reliable growth they were famous for.

Recovery Potential

For any investors out there who think they might have missed the rally, there’s plenty of reasons to be excited yet. On Tuesday of this week, the folks over at Wells Fargo upgraded Schwab shares from Equal-Weight to Overweight. Analyst Christopher Harris pointed out the massive recovery play potential as companies that lagged behind tech this summer start to heat up with the prospect of a COVID vaccine soon becoming available.

We’ve already seen momentum start to flow into retail and travel names, it makes sense that it would filter through to the likes of Schwab too. A fresh price target of $58 suggests upside of about 15% from Monday’s closing price and were shares to hit this, they’d be only a couple of cents away from 2018’s high.

In a note to clients, Harris summed up by saying; “we view Schwab stock as an excellent play on the 'Covid reflation' theme as it is one of the most interest-rate sensitive financials that also has a proven ability to organically grow at 5% plus. Positively for Schwab, a scenario of rising medium to long-term interest rates (and flat short-term interest rates) would also be EPS accretive relative to expectations”. Harris estimates that even a 25 basis point increase from the Fed could result in a 10% jump in Schwab’s bottom line, effectively double the estimated 5% jump that its peers in the brokerage industry would see.

Getting Involved Now

Late last month, Citi had struck a similarly bullish tone when they told their clients that Schwab and its brokerage peers were on the verge of a “meaningful breakout”. As yield curves start to widen, their multiples start moving in the right direction, and these kinds of expected macro movements have surely underpinned much of the recent rally.

Technically speaking, shares look to have broken out to the upside from a tightening pennant, always a bullish signal. The stock’s RSI is barely at 70 which suggests it has some room yet before it can be called overbought, meaning we could well be looking at the start of a fresh run towards all-time highs.