Nothing makes investors re-examine what’s in their portfolios like a market sell-off. Stocks that soared during the good times can be the biggest losers when times get tough.
It’s at a time like this, when the Nasdaq has dropped 10% from its late-summer high, that companies operating on steady, sound financial principles become much more attractive.
The stock we’re bringing you today is a financial firm. Now, you might have heard that financial stocks are one of the worst places to be in a time of stock market panic. And that’s true, to an extent.
But the reality is that, even in the worst of times, there is still financial activity going on. People still need a place to protect their assets and make transactions.
And the place they’re going to choose is not going to be the overleveraged banking behemoth whose “creative” investing instruments turned out to be little more than smoke and mirrors.
It’s going to be the solid firm that has always offered the lowest prices, the highest-quality service, and has been operating with quiet integrity in both good times and bad.
Our pick today is exactly that. That’s why the number of accounts it held actually increased during the financial crisis of 2008-09.
When the whole market dips, a stock like this may temporarily go down with them too. But if the worst really does happen, this is the kind of stock that’s going to be the mainstay in your portfolio. It’s the one you can depend on to keep delivering a healthy balance sheet while the tech superstars are struggling to stay afloat.
No wonder it was just flagged by our Money Morning Stock VQScore™ system, indicating that it is undervalued and due for a rise.
In fact, this one might be undervalued by as much as 50%.
This Quiet Innovator Combines Old-Fashioned Values with Leading-Edge Tech
When investment trade commissions were deregulated in 1975 – they used to be fixed by the SEC – a lot of Wall Street firms saw it as an opportunity to jack up prices.
But Charles Schwab Corp. (NYSE: SCHW), founded by its namesake a few years earlier, saw a different opportunity. The firm became a pioneer in discount trading, and it’s still the leader in that category.
Whether you’re buying $100 or $10,000 worth of stock, the fee for an online account at Charles Schwab comes in at a flat rate of just $4.95. And the expense ratios on its index funds (0.03% for the S&P 500) beat out its top competitors.
Now, when you think of discount brokers, you might picture a seedy operation that is not concerned about its customers.
But Schwab is just the opposite.
The firm operates on the philosophy that it can always offer quality service at the lowest prices, and its customers will reward the firm with loyal patronage that will pay off in spades.
That’s exactly how it has played out.
That’s how Schwab has grown to a market cap of $66 billion. It has 11.3 million accounts totaling about $3.6 trillion – with a t – in assets. That’s 7% of all the available assets to invest in the United States.
What makes Schwab a great bet in times of trouble is that it follows old-school principles. Beating the market is tough to do even for the smartest investors. So Schwab helps clients find advantages through personalized financial planning, asset allocation, tax efficiency, and – of course – the lowest trade costs in the market. Any dollar not spent on a commission is no different than a dollar gained with a higher-priced broker.
But if you think those old-school principles mean this is a stodgy, old-fashioned firm that won’t be able to keep up with the times, think again.
As an article in Bloomberg this month put it, Schwab was “a fintech firm long before the word ‘fintech’ was coined.” And the company continues to emphasize innovation – just not recklessness.
The current CEO, Walter W. Bettinger, II, had his work cut out for him when he took over the spot once occupied by the legendary Chuck Schwab a decade ago. But his tenure has been marked by nothing but success.
Schwab’s asset base has tripled under Bettinger, with the client base growing more than 50%. And more than half of the new retail accounts have been opened by people under the age of 40 – a sign that Schwab is very much in step with the changing times.
The firm has been a leader in digital innovations, like its AI-powered Schwab Intelligent Portfolios, which can efficiently offer sound investment advice for most retail clients.
In spite of the firm’s continued early adoption of digital technologies, it has never lost sight of its clients. As the founder once said, “We will survive if we do the right thing for people. We will collapse if we ever deviate from that mission.”
All signs suggest that Schwab is, in fact, sticking to that mission.
For two years in a row, J.D. Power has ranked it the highest in investor satisfaction among full-service brokerage firms. It was named one of the world’s most admired companies in 2017 by Fortune. And Investor’s Business Daily ranked it No. 1 among online brokers in customer service and trade reliability.
That reputation and commitment to good service is why Schwab will hold firm even in the toughest financial times.
But more importantly, from an investor’s perspective, this stock is also ready to double in the near future.
Why Now Is the Time to Buy SCHW
Schwab’s share price did slip about 7% in the most recent downturn – part of the general fear that sent most stocks plummeting.
There’s a difference, though, in stocks that fall because they were overvalued – and thus have trouble regaining momentum – and stocks that take a temporary hit and bounce back because they are fundamentally strong.
Schwab is one of the latter. And for those stocks, a temporary dip is exactly the right time to buy. A look at its numbers confirms that it’s on solid ground.
Earnings per share has grown every year since 2012 and is on pace to soar 52% this fiscal year. According to FactSet, that growth is projected to continue through at least 2021.
Schwab has also boosted its pre-tax profit margin in each of the last four years, growing it from 31.4% to 42.4% in that time.
Its forward price/earnings-growth (PEG) ratio – which would be 1 for a fairly priced stock – comes in at just 0.8, suggesting a rise of 25%.
But looking back to its growth in the last 12 months, Schwab’s PEG comes in at 0.53.
That means this stock could double in value based on its past growth alone.
So here’s a stock that could give you a big gain right off the bat and then quietly deliver strong gains for years to come, even when turbulent times inevitably arise.
Now’s the time to take advantage of this opportunity.
— Stephen Mack
Source: Money Morning