Ensemble Capital, an independently-owned investment firm, recently published its first-quarter Ensemble Fund commentary – a copy of which can be downloaded here. During the first quarter of 2020, the Ensemble Fund returned -18.6%, while the benchmark S&P 500 was down 19.6%.
In the said letter, Ensemble Capital highlighted a few stocks and Schwab Charles Corp (NYSE:SCHW) is one of them. Schwab Charles is a financial services company based in California. Year-to-date, SCHW stock lost 24.3% and on May 4th it had a closing price of $35.63. Its market cap is of $46.33 billion. Here is what Ensemble Capital said:
“Charles Schwab Corp. (4.8% weight in portfolio): With $4 trillion in custodied assets, Schwab is one of the largest financial institutions in the US and among the fastest growing. It has two main lines of businesses that generate substantially all of its revenue, its asset management and advisory business, which collects revenue from a fee charged as a percent of assets under management, and its bank business, which collects a spread between the interest it pays clients for their cash balances and the rate it collects from investing that pool of cash in predominantly low risk bonds issued, or backed, by the US government.
Schwab has a long history dating back to the 1970’s and has lived through many recessions and shocks. Consistent along its history has been the ability to adapt and grow by winning for its clients and itself by delivering valuable services more cost effectively as it has leveraged its growing asset and operational scale.
We believe its business model is built for both growth and resilience. The combination of the AUM based asset management business and the spread-based bank can create a balancing dynamic, though with the Fed funds rate cut this year at 150 basis points, both businesses will be pressured but with some offset as clients raise cash due to uncertainty and market volatility.
Net-net, we expect to see Schwab’s revenue decline relative to 2019 in one of the most severe economic periods in history, while operating margins are expected to remain robust even after declining materially.
On the other hand, we believe many of the FinTech startups competing in this space will see a much harsher impact in their ability to continue serving customers and investing in their businesses during this period of tighter capital availability and their subscale, developing business models. This will earn Schwab even greater competitive advantage exiting this period.”
In Q4 2019, the number of bullish hedge fund positions on SCHW stock increased by about 19% from the previous quarter (see the chart here).
Disclosure: None. This article is originally published at Insider Monkey.
