Charles Schwab’s Initiative Changes Are a Long-Term Positive

Key Points

• Charles Schwab is the leading retail brokerage that continues to grow as it achieved record client asset growth of 17% YoY to $9.4 trillion in its second quarter.
• Schwab’s stock took a 15% haircut following its Q2 2024 earnings due to a number of short-term initiatives resulting in a halt to its stock buyback program.
• Options traders can consider using cash-secured puts at Fib pullback support levels to implement a wheel strategy for income in addition to the 1.54% annual dividend yield.

The cliché "Short-term pain for long-term gain" rings true in the stock market, notably during earnings season. Companies that miss forecasts or cut guidance find their stocks punished as investors jump ship for greener pastures. However, there is a distinction between guidance cuts based on softening demand and deliberately taking proactive measures to ensure long-term strength at the cost of short-term weakness to the bottom line.

The latter is the case with retail financial sector giant Charles Schwab Inc. NYSE: SCHW.

Charles Schwab competes with retail brokerages and fintechs catering to self-directed investors and traders, including  Robinhood Markets Inc. NASDAQ: HOOD, Sofi Technologies Inc. NASDAQ: SOFI and E-Trade owned by Morgan Stanley NYSE: MS.

The Juggernaut Continues to Grow

Charles Schwab's business is nowhere near slowing down. Schwab saw total client assets swell 17% YoY to a record $9.4 trillion in its second quarter of 2024. New client assets added grew 17% in the quarter to $61.2 billion. Total net income was $1.3 billion or 66 cents per diluted share. Schwab opened over 2 million new brokerage accounts in 2024. Revenues only grew by 1% YoY, but that's an improvement from being down 7% YoY in the first quarter of 2024.

Modern Wealth Solutions Business Surged

Schwab has evolved from being a brokerage for self-directed investors to guiding with its wealth solutions like comprehensive financial planning with its live financial consultants offering trust, banking and lending services. Retail investors have shown great interest in its key offerings like Schwab

Managed Portfolios offers professionally managed diversified portfolios of ETFs and mutual funds. Its Intelligent Portfolios are a robo-advisor platform that creates and manages a diversified portfolio of ETFs based on customer risk profiles and objectives.

Its Modern Wealth Solutions saw 30% year-to-date (YTD) enrollment growth and 56% YTD inflows of $25 billion into its Managed Investing solutions. Client assets receiving ongoing advisory services rose 16% YoY. Margin balances rose 15% since the end of 2023 to $71.7 billion. Client assets gained 2%, and new brokerage accounts grew 5% in July.

Active Brokerage Account Continues to Swell

Schwab continued to see active brokerage accounts swell by 4% YoY to 35.6 million. It completed the final onboarding of its TD Ameritrade customers. Schwab operates a number of active trading platforms, including Thinkorswim, Schwab Trading powered by Ameritrade, Schwab.com and Schwab Mobile. As long as the markets are volatile, active traders can continue to swell.

Retail Trader Optimism Hits a 2-Year High

On Aug. 28, 2024, Schwab posted survey results that indicated the highest level of optimism among retail traders in the past two years. 56% reported a bullish outlook over the next quarter, up from 46% sequentially. The optimism stems from falling inflation and increased bullishness about upcoming interest rate cuts. Survey respondents expecting a 50 bps or more in interest rate cuts rose to 33%, up from 25% in the previous quarter. 

Short-Term Initiatives Causing a Temporary Halt To Stock Buybacks

Schwab has decided to go with a less capital-intensive model. They plan to reduce bank-level debt over the next several quarters. Unfortunately, this move requires a halt to its current stock buyback program. This was a key reason for the 15% haircut following its Q2 2024 earnings release.

Short-Term Pain from Initiatives for Long-Term Gain

Management will shorten its investment portfolio duration, implying near-term losses and earnings volatility. This will galvanize the company longer term making it less sensitive to rate changes by reducing maturity divergence risk, which is one of the biggest hurdles with larger banks.

They will also shrink corporate bank balance sheets and optimize excess third-party bank deposits. TD Bank and Schwab will only be used for sweeps.

TD Bank Cuts Its Stake to 10.1%

A further cause for the selloff in SCHW came just after Toronto-Dominion Bank NYSE: TD announced it sold $2.5 billion in SCHW stock at a discounted $61.65 per share. This comes after TD Bank disclosed it sold 40.5 million of SCHW common stock, which trimmed its stake down from 12.3% to 10.1%. The good news for investors is that it's revealed and relieved much of the selling pressure on SCHW stock. Stocks usually rise after a large seller discloses their actions.

SCHW Stock is Trying to Break Out of a Descending Triangle Pattern

A descending triangle is a bearish pattern comprised of a descending upper trendline connecting lower highs and a flat-bottom lower trendline support meeting at the apex point. SCHW's descending trendline formed at the $70.71 gap down price level, and its flat-bottom trendline support is at the $61.33 Fibonacci (fib) price level.

SCHW stock bottomed at the $61.33 fib and has been making lower highs on the bounces. However, it’s attempting to breakout of the bearish pattern above the $64.32 descending trendline fib resistance.

The daily relative strength index (RSI) is powering the move as it also tries to push through the 50-band resistance. Fib pullback support levels are at $64.32, $61.33, $58.34 and $54.08.  

Charles Schwab stock’s average consensus price target is $74.00 and its highest analyst price target sits at $90.00.

Actionable Options Strategy

Seasoned options traders might consider using cash-secured puts at the fib pullback levels to buy on a pullback. A wheel strategy can enhance income from buying on pullbacks and writing covered calls in addition to collecting its 1.54% annual dividend yield.