We recently compiled a list of the 10 Best Blue Chip Stocks Under $100. In this article, we are going to take a look at where The Charles Schwab Corporation (NYSE:SCHW) stands against the other blue chip stocks under $100.
We all are wondering only one thing: Is the U.S. economy headed for a no, soft, or hard landing?
The re-acceleration (or the no-landing) case is being advocated by strong job growth, healthy double-digit expectations for growth in corporate earnings, and inflation remaining above 2.5%. On the other hand, the potential for a soft landing or (below-trend growth) is supported by a slowdown in forward-looking labor market indicators. Such indicators include hiring rates and subdued wage growth which might weigh over real household incomes.
Finally, the case for a hard landing (recession, as you might say) depends on historical precedent. A sustained period of aggressive tightening might push the economy into recession. However, there is enough evidence that the US economy continues to slow and inflation pressure is easing.
Soft Landing or Recession- The Debate Continues
As of now, investors continue to debate between a soft landing or a recession. The macro data is not of much help. This is because a slowdown can be perceived in 2 ways: Firstly, it can be assumed as a healthy rebalancing which enables inflation to cool without prompting negative growth, and secondly, the path to a not-so-severe recession starting in the latter half of 2024 or early 2025.
The broader financial markets are hinting at the soft-landing scenario. This is evident given the optimism about earnings-growth expectations. Apart from this optimism, there is optimism around high-yield credit spreads which are pricing cyclically low levels of defaults.
The conditions are improving in several developed economies, with some positive news coming from China. China’s outlook seems to be brightening with the implementation of policy measures to stabilize the property market and boost the overall Chinese economy. The country faces significant longer-term structural issues associated with high savings, subdued consumption, over-capacity, and dependency on export demand.
The policy moves have aided the near-term outlook and led to the rise in the Chinese benchmark index from deeply oversold levels earlier in the year. Hang Seng Index saw an increase from ~16,224 levels in mid-April to ~19,636 levels in mid-May.
Soft-landing expectations are expected to remain for the next few months as and when inflation worries decline. Since there is asymmetry over the mid-year return outlook, experts should also closely watch for signs of a deeper downturn.
With So Much Uncertainty, What Should Investors Do?
Ever since the inflation and labor market worries started taking a toll on the broader stock markets, investors have decided to flock to recession-proof and high-quality blue-chip companies. They have all the reasons for it, as these companies are capable of weathering economic volatility. The uncertainties about job growth, higher unemployment, and speculations regarding potential Federal Reserve rate cuts are some of the factors weighing over investors’ confidence.
That being said, the latest readings, ranging from inflation to jobless claims and rising retail sales, revived investors’ confidence in the US economy. Experts believe that the US economy might be heading for a “Goldilocks” scenario characterized by contained price pressures along with healthy growth. Despite fading fears, investors continue to prefer making investments in blue-chip stocks.
Even though there are several investing strategies and trends available, nothing can beat the strategy of investing in a blue-chip company that has a strong reputation.
What Are Blue-chip Stocks? An Overview
If you are hunting for some smart investments to add to your portfolio, you might have come across the term “blue-chip stocks.” These stocks are renowned for being reliable investments and they can provide numerous advantages. The blue-chip stocks are the ones having high value and potential for long-term growth.
The term, blue chip, comes from poker in which the highest-value chips are blue. Therefore, blue chip describes some of the highest-quality stocks in the market. Blue-chip stocks are from renowned and well-established companies with consistently strong performance.
More often than not, such stocks tend to have a long history of shelling out dividends and growing their market share. Even in the market downturn, blue-chip stocks remain resilient. Since well-established and renowned companies issue them, the prices of blue-chip stocks rise more slowly as compared to other stocks. Even in the downturns, these stocks are less likely to witness rapid drops. These companies have healthy balance sheets and resilient business models, because of which these are tagged as “one of the safest investments.”
How Can Blue-chip Stocks Help in Current Economic Worries?
The blue-chip stocks are sometimes synonymous with reliability and stability. Such stocks exhibit companies that are leaders in their respective industries. As a result, they boast a history of stable financials and consistent performance. They provide investors with a sense of security whenever there is an economic slowdown.
For example, iShares S&P 100 ETF, a leading bluechip ETF, saw an increase of ~20% on the YTD basis amidst uncertainty in the global markets like higher inflation, uncertain labor market, geopolitical worries, a slowdown in China, etc. In comparison, the broader market, Dow Jones Industrial Average has risen by just over ~7% on a YTD basis.
Besides size, blue-chip companies tend to remain on the front foot of innovation as they invest heavily in R&D. In stormy and difficult market conditions, dividends can offer a source of steady income. These companies possess long histories of paying generous dividends. They also have a policy of consistently increasing their payouts. Blue-chip stocks have also shown their resilience in the past, having a strong track record of weathering market downturns. For example, in 2020, when the global economy came to a standstill due to the deadly COVID-19 pandemic, the bluechip ETF delivered a return of over ~19%. On the other hand, the broader market saw an increase of just ~5%.
Our methodology
To make our list of best blue-chip stocks under $100, we started by using the Finviz screener. We looked for profitable companies with moats that are likely to last for at least the next 25 Years. We then ranked the best blue-chip stocks according to their potential upside, as of August 16.
At Insider Monkey, we are obsessed with the stocks that hedge funds pile into. The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points (see more details here).
A corporate finance professional studying a financial performance chart.
The Charles Schwab Corporation (NYSE:SCHW)
Share Price as of August 16, 2024: US$65.55
Average Upside Potential: 11.37%
The Charles Schwab Corporation (NYSE:SCHW) carries out operations in brokerage, banking, and asset-management businesses. It operates a large network of brick-and-mortar brokerage branch offices, a well-established online investing website, and has mobile trading capabilities.
One of the critical parts of its efficient business model is the company’s deposits. Such deposits have served as the low-cost funding base, which is critical for success. That being said, rapid increases in rates have impacted the company’s business. Higher rates prompted clients to shift their deposits from lower-yielding accounts to higher-yielding alternatives. These alternatives include high-yield savings or money market funds. From August 2022 to March 2023, The Charles Schwab Corporation (NYSE:SCHW) lost over ~$45 billion in deposits. This means, on average, it lost ~$5.6 billion per month.
However, as of now, deposit outflows have slowed, and the expectations of interest rate cuts should act as a tailwind for The Charles Schwab Corporation (NYSE:SCHW).
The company enjoys a wide economic moat. Given its massive scale and industry-leading cost efficiency, The Charles Schwab Corporation (NYSE:SCHW) has the potential to steer through severe competitive pressures and earn above its cost of capital. Its low costs and large client base should offer flexibility to develop products. Its new online advisory platform is expected to benefit from low cost and higher client reach. This will help the leading broker to be more profitable as compared to existing players.
The company’s competitive advantage is enabled through shared economies of scale, whereby, Schwab reduces its costs to the customer, and attracts new assets. This enables the company to lower even more costs to the customer. Analysts at Jefferies Financial Group increased their price target on shares of the company from $85.00 to $88.00. They gave a “Buy” rating on 8thJuly.
Fiduciary Management Inc. (FMI), an independent money management firm, released its first quarter 2024 investor letter. Here is what the fund said about The Charles Schwab Corporation (NYSE:SCHW):
“We last wrote about The Charles Schwab Corporation (NYSE:SCHW) a year ago in the midst of the banking crisis. At the time, the worst fears were a bank run and/ or balance sheet impairment. Positively, these did not come to pass. As a refresh of our interest in the business, Charles Schwab is a leading discount broker. The business benefits from long run market appreciation and Schwab’s better mousetrap has allowed it to gain share on top of market growth, which has driven long run revenue growth of 10%. The competitive advantage comes from shared economies of scale, whereby Schwab lowers costs to the customer, thereby attracting new assets which then lets them lower costs even more to the customer. The rapid rise in interest rates that precipitated the banking crisis contributed to a challenging last 18 months for Schwab, as clients moved bank cash to higher yielding instruments. This led to a significant, albeit short-term, earnings headwind. As we move into 2024, we believe the worst is behind them. We expect Schwab will experience strong earnings growth for the next few years, driven by accelerating revenue growth and renewed expense discipline. Despite this attractive outlook, Schwab trades for 21 times trough earnings and only 14 times our estimate of normalized earnings.”
Overall SCHW ranks 8th on our list of the best blue chip stocks under $100. While we acknowledge the potential of SCHW as an investment, our conviction lies in the belief that some deeply undervalued AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued AI stock that is more promising than SCHW but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.