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Should Investors Buy the Dip in Charles Schwab (SCHW)?

Fiduciary Management, Inc recently released its Q1 2020 Investor Letter, a copy of which you can download below. The FMI Large Cap Fund posted a return of -23.0% for the quarter, underperforming its benchmark, the S&P 500 Index which returned -19.60% in the same quarter. You should check out Fiduciary Management’s top 5 stock picks for investors to buy right now, which could be the biggest winners of the stock market crash. There weren’t a lot of funds who could deliver these kinds of returns without shorting the market or using aggressive put options.

In the said letter, Fiduciary Management 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 30.8% and on May 14th it had a closing price of $33.40. Its market cap is of $42.5 billion. Here is what Fiduciary Management said:

“Charles Schwab is a discount broker. The discount brokerage industry has been subject to persistent pricing pressure over time (equity trades are now free) and as a result, we expect that this market will continue to consolidate into the hands of the two largest players: Fidelity and Charles Schwab. Despite the pricing pressure, this is a great business. The franchise benefits from long-term market appreciation, and Schwab’s excellent interface and customer service has allowed it to gain market share. Revenue has grown approximately 10% over time, while earning a 30-year average return on equity of 20%. Schwab’s scale is large enough that they can now monetize the business primarily through net interest income on idle client cash (~2/3 of sales). This is a big change for an established business, but we think it has two benefits: 1) client cash generates revenue for Schwab, yet it is not an explicit cost for the client. As a result, we think pricing pressure will be modest over time; and 2) clients shift from risk assets to cash in volatile markets. This acts as a natural hedge in down markets, and we are currently seeing this play out today. Schwab’s balance sheet has little-to-no credit risk (a good position going into a recession) and they are well-capitalized with a tier 1 equity ratio of 7.3%. The shares currently trade at a significant discount to history.”

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), so a number of other hedge fund managers seem to agree with SCHW’s growth potential.

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

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