Interest rates have nowhere to go but up, but the market is pricing securities as though rates will stay at historic lows forever. This presents investors with an opportunity to buy stocks getting hammered by the low interest rates at a bargain price.
When buying a company with the intention of holding onto it for many years, investors should always normalize the financials. In other words, a company earning a meager net interest margin today is going to earn a much higher net interest margin in a more normal interest rate environment. Therefore, investors should evaluate the company based on a higher net interest margin.
Charles Schwab Corp (NYSE:SCHW) is one such company that is getting clobbered by low interest rates. Its net interest income is only slightly higher today than it was in 2008, despite controlling significantly more assets today than it did just a few years ago. But net interest income should rise dramatically alongside interest rates.
Net interest income is only one component of Charles Schwab Corp (NYSE:SCHW)’s earnings. The company also earns revenue from transaction fees for its online brokerage and asset management fees. The company’s recent acquisition of optionsXpress positions it to generate more transaction fees.
However, both Charles Schwab Corp (NYSE:SCHW)’s brokerage business and asset management business do much better during less volatile markets. A market crash — or the general loss of confidence by retail investors — would be detrimental to all parts of Schwab’s business.
While Schwab has both a brokerage and an asset management business, its primary competitors only have one or the other.
For instance, TD Ameritrade Holding Corp. (NYSE:AMTD) is a plain vanilla online broker: it generates revenue from transaction fees and margin loans. It is doing relatively well despite the low interest rate environment, but will still benefit from higher interest rates due to higher margin rates. The company is also dependent on rising equity markets, as most retail investors are more active during a bull market than a bear market.
TD Ameritrade Holding Corp. (NYSE:AMTD) has primarily grown through acquisitions, which is generally not a recipe for long-term success. Management has been a little overzealous at times and has paid fair if not high prices for some past acquisitions.
In addition, the company’s client base is less sticky than Schwab’s; while Charles Schwab Corp (NYSE:SCHW) has a large percentage of long-term investors as brokerage clients, TD Ameritrade Holding Corp. (NYSE:AMTD) has a lot more short-term traders which tend to be more fickle. However, Schwab’s purchase of optionsXpress adds a number of short-term traders to its client base as well.