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Charles Schwab (SCHW) Has Fallen 6% in Last One Year, Underperforms Market

If you are looking for the best ideas for your portfolio you may want to consider some of Wedgewood Partners top stock picks. Wedgewood Partners, an investment management firm, is bearish on Schwab Charles Corp (NYSE:SCHW) stock. In its Q2 2019 investor letter – you can download a copy here – the firm discussed its bearish thesis on Schwab Charles Corp (NYSE:SCHW) stock. Schwab Charles Corp (NYSE:SCHW) is a financial services company.

On July 16, 2019, Wedgewood Partners had released its Q2 2019 investor letter. The investment firm said that it sold its position in Schwab Charles Corp (NYSE:SCHW) stock in Q2 2019. The stock has posted a return of -6.0% in the trailing one year period, underperforming the S&P 500 Index which returned 20.5% in the same period. This suggests that the investment firm was right in its decision. On a year-to-date basis, Schwab Charles Corp (NYSE:SCHW) stock has fallen by 24.4%.

Wedgewood Partners fund posted a return of 4.3% in the second quarter of 2019, in-line with the S&P 500 Index which also returned 4.3% in the same quarter. Let’s take a look at comments made by Wedgewood Partners about Schwab Charles Corp (NYSE:SCHW) in the Q2 2019 investor letter.

“We sold our remaining position in Charles Schwab after reducing the position during the first quarter. Schwab remains an exceptionally well-run company that we think is coming to the tail-end of a couple of favorable multi-year trends. First, as the Company expanded profitability and compounded earnings over the past several years, Schwab’s balance sheet capacity expanded, which allowed it to transfer over $70 billion in off-balance sheet client assets into Schwab deposits. Those deposits provided the capital for Schwab to meaningfully expand their interest earning assets and revenues in a lower-risk manner. We think the Company still has opportunity here, longer-term, to grow their balance sheet, but more inline with the mid-single digit rate consistent with its asset-gathering growth. In addition, the multi-year tailwind of favorable monetary policy, relative to Schwab, has leveled out and is at risk of turning into a headwind. For example, 10-year U.S. treasury yields have retreated over 100 basis points in the last six months – after a multi-year march higher. Further, as we have chronicled in recent Letters, the Federal Reserve halted its Fed Funds rate hiking spree earlier this year. We are not sure what the Federal Reserve targets, despite what they say, as inflation isn’t much different today than any of the past 5-7 years along with mostly robust macroeconomic data – at least in early 2019. While neither the backup in 10-year yields, nor the pause by the Fed are unprecedented by any means, we are concerned that they represent future, and significant, headwinds to Schwab’s growth rates.

Bullishly, over the past several years, Schwab has diligently managed expense growth to be below revenue growth. We would expect the Company to be able to continue this practice despite slowing top-line growth, and supplement earnings per share growth with buybacks, given the stock is trading at undemanding, though potentially understated, multiples. However, and in conclusion, we recognize a couple of multi-year tailwinds to the Company’s growth rate have faded, so we sold our remaining position.”

Last month, we published an article revealing that Giverny Capital is bullish about Schwab Charles Corp (NYSE:SCHW) stock. The investment firm said that Charles Schwab opened record number of new brokerage account in March amid the coronavirus pandemic.

In Q2 2020, the number of bullish hedge fund positions on Schwab Charles Corp (NYSE:SCHW) stock increased by about 15% from the previous quarter (see the chart here), so a number of other hedge fund managers don’t seem to agree with SCHW’s downside potential. Our calculations showed that Schwab Charles Corp (NYSE:SCHW) isn’t ranked among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds’ poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

At Insider Monkey we scour multiple sources to uncover the next great investment idea. Currently, investors are pessimistic about commercial real estate investments. So, we are checking out this contrarian play to diversify our market exposure. We go through lists like the 10 most profitable companies in America to pick the best large-cap stocks to buy. Even though we recommend positions in only a tiny fraction of the companies we analyze, we check out as many stocks as we can. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. If you want to find out the best healthcare stock to buy right now, you can watch our latest hedge fund manager interview here. You can subscribe to our free enewsletter below to receive our stories in your inbox:

Disclosure: None. This article is originally published at Insider Monkey.