Is SCHW A Good Stock To Buy Now?

We at Insider Monkey have gone over 817 13F filings that hedge funds and prominent investors are required to file by the SEC The 13F filings show the funds’ and investors’ portfolio positions as of September 30th. In this article, we look at what those funds think of The Charles Schwab Corporation (NYSE:SCHW) based on that data.

Is SCHW a good stock to buy now? The Charles Schwab Corporation (NYSE:SCHW) was in 53 hedge funds’ portfolios at the end of the third quarter of 2020. The all time high for this statistics is 71. SCHW investors should pay attention to a decrease in hedge fund sentiment of late. There were 71 hedge funds in our database with SCHW positions at the end of the second quarter. Our calculations also showed that SCHW isn’t among the 30 most popular stocks among hedge funds (click for Q3 rankings and see the video for a quick look at the top 5 stocks).

Video: Watch our video about the top 5 most popular hedge fund stocks.

Hedge funds’ reputation as shrewd investors has been tarnished in the last decade as their hedged returns couldn’t keep up with the unhedged returns of the market indices. Our research has shown that hedge funds’ small-cap stock picks managed to beat the market by double digits annually between 1999 and 2016, but the margin of outperformance has been declining in recent years. Nevertheless, we were still able to identify in advance a select group of hedge fund holdings that outperformed the S&P 500 ETFs by 66 percentage points since March 2017 (see the details here). We were also able to identify in advance a select group of hedge fund holdings that underperformed the market by 10 percentage points annually between 2006 and 2017. Interestingly the margin of underperformance of these stocks has been increasing in recent years. Investors who are long the market and short these stocks would have returned more than 27% annually between 2015 and 2017. We have been tracking and sharing the list of these stocks since February 2017 in our quarterly newsletter.

Michael Gelband of ExodusPoint Capital

At Insider Monkey we leave no stone unturned when looking for the next great investment idea. For example, we believe electric vehicles and energy storage are set to become giant markets. Tesla’s stock price skyrocketed, yet lithium prices are still below their 2019 highs. So, we are checking out this lithium stock right now. We go through lists like the 15 best blue chip stocks to buy 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. You can subscribe to our free daily newsletter on our website. Keeping this in mind we’re going to review the latest hedge fund action regarding The Charles Schwab Corporation (NYSE:SCHW).

Hedge fund activity in The Charles Schwab Corporation (NYSE:SCHW)

At the end of the third quarter, a total of 53 of the hedge funds tracked by Insider Monkey held long positions in this stock, a change of -25% from the previous quarter. Below, you can check out the change in hedge fund sentiment towards SCHW over the last 21 quarters. So, let’s find out which hedge funds were among the top holders of the stock and which hedge funds were making big moves.

The largest stake in The Charles Schwab Corporation (NYSE:SCHW) was held by Generation Investment Management, which reported holding $1079.3 million worth of stock at the end of September. It was followed by Route One Investment Company with a $527.6 million position. Other investors bullish on the company included Diamond Hill Capital, Greenhaven Associates, and D E Shaw. In terms of the portfolio weights assigned to each position JNE Partners allocated the biggest weight to The Charles Schwab Corporation (NYSE:SCHW), around 17.74% of its 13F portfolio. Yost Capital Management is also relatively very bullish on the stock, earmarking 15.05 percent of its 13F equity portfolio to SCHW.

Judging by the fact that The Charles Schwab Corporation (NYSE:SCHW) has faced bearish sentiment from the aggregate hedge fund industry, we can see that there was a specific group of hedge funds that elected to cut their entire stakes in the third quarter. Intriguingly, Renaissance Technologies dropped the biggest position of the 750 funds tracked by Insider Monkey, comprising close to $95.9 million in stock, and Peter Seuss’s Prana Capital Management was right behind this move, as the fund dropped about $24.5 million worth. These moves are intriguing to say the least, as total hedge fund interest was cut by 18 funds in the third quarter.

Let’s go over hedge fund activity in other stocks similar to The Charles Schwab Corporation (NYSE:SCHW). These stocks are The PNC Financial Services Group Inc. (NYSE:PNC), Petroleo Brasileiro S.A. – Petrobras (NYSE:PBR), Ferrari N.V. (NYSE:RACE), Equinor ASA (NYSE:EQNR), TAL Education Group (NYSE:TAL), Spotify Technology S.A. (NYSE:SPOT), and Illumina, Inc. (NASDAQ:ILMN). This group of stocks’ market caps match SCHW’s market cap.

Ticker No of HFs with positions Total Value of HF Positions (x1000) Change in HF Position
PNC 37 740197 -15
PBR 31 1006663 2
RACE 31 1322171 6
EQNR 20 324305 10
TAL 41 2136912 1
SPOT 44 1641764 8
ILMN 44 1373332 3
Average 35.4 1220763 2.1

View table here if you experience formatting issues.

As you can see these stocks had an average of 35.4 hedge funds with bullish positions and the average amount invested in these stocks was $1221 million. That figure was $3280 million in SCHW’s case. Spotify Technology S.A. (NYSE:SPOT) is the most popular stock in this table. On the other hand Equinor ASA (NYSE:EQNR) is the least popular one with only 20 bullish hedge fund positions. Compared to these stocks The Charles Schwab Corporation (NYSE:SCHW) is more popular among hedge funds. Our overall hedge fund sentiment score for SCHW is 59.4. Stocks with higher number of hedge fund positions relative to other stocks as well as relative to their historical range receive a higher sentiment score. Our calculations showed that top 20 most popular stocks among hedge funds returned 41.3% in 2019 and outperformed the S&P 500 ETF (SPY) by 10 percentage points. These stocks returned 31.6% in 2020 through December 2nd but still managed to beat the market by 16 percentage points. Hedge funds were also right about betting on SCHW as the stock returned 40.9% since the end of September (through 12/2) and outperformed the market by an even larger margin. Hedge funds were clearly right about piling into this stock relative to other stocks with similar market capitalizations.

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