It's Time to Take Stock of Schwab

Few companies in the brokerage field can match the long-term record of Charles Schwab . From 2010 through 2019 every major metric showed terrific gains. Shareholders did well, too. The stock surged from a 2010 nadir of $12.60 to an all-time peak north of $60 in May of 2018. The shares were somewhat expensive at that time, commanding almost 25-times forward earnings while paying a historically subpar yield of just 0.76%. The stock then drifted lower, but still fetched almost $52 in December of 2019. Virus-related market action took SCHW down further, to $28 in late March. As of Tuesday, SCHW was hanging around the $33 - $34 level. The company's fundamentals have now run well ahead of the share price, creating a good entry point for new commitments. Schwab is fiscally strong, resides in the top 10% of all stocks in terms of earnings predictability and even pays a secure dividend of about 2.15%. What is SCHW really worth? Its normalized multiple runs about 23.5-times, accompanied by around 1.20% in current yield. At $33.42 per share those numbers are 14.5-times along with a well above average yield. Even a partial regression to the mean valuation reversion suggests $46 is possible by the end of this year and at least $48 by Dec. 31, 2021. Those goals are not far fetched. SCHW peaked between $49.60 and $60.20 during each of the years from 2017 right through 2020 year to date. Excepting last summer's momentary low, due to the elimination of commissions, Schwab hasn't changed hands at a lower multiple since the very dark days of 2008. Buying last September's bottom provided nimble traders the chance to book 49% gains in under three months. I expect the current low price will be a launching point for another good rally. Yahoo Finance calls SCHW undervalued while looking for a $39.54 target within 12-months. I'd say that's way too conservative as it represents just 17.2-times Value Line's 2020 estimate for SCHW. Morningstar is more bullish than Yahoo Finance. It lists the shares as a 4-star, out of 5, buy. It sees present-day, as opposed to year-ahead, fair value as $42.50. In addition, Morningstar notes the company's wide economic moat and exemplary management team. Simply rising to $42.50 would provide about 28% in total return if it occurs over the course of a full year. I doubt it will take that long to achieve. Value Line's 18-month midpoint projection sees SCHW rising by 55%, to $54. The firm also sees a potential gain to $80 by 2025 if all goes well. No matter which opinion convinces you most, it appears that owning SCHW here will be a good investment over the coming months and years. Option-savvy traders can play SCHW via a couple of different techniques. The graphic below detailed actual prices for Schwab's Jan. 21, 2022 options at $35 and $40 strikes. Selling a Jan. 2022 $40 put for $14.60 would drop the worst-case, forced purchase price down to just $25.40. That's equal to, or lower than the lows in every single year since 2014. Schwab earned just 95-cent per share in 2014 and paid only 24-cents in annual dividends. It's much more valuable on fundamentals today. Maximum profit on this put sale would be keeping 100% of the $1,460 per contract received. That would occur if the shares close on expiration day at $40 or above. The worst-case scenario would be owning SCHW at the absolute best entry price in about six years. Sophisticated traders might do even better by setting up a Jan. 21, 2022 $35 buy/write combination. That involves buying 100 shares, or some multiple of that, while shorting $35 calls and $35 puts at the same strike price and the same expiration date. Details on a 100-share combo, with 1 call and 1 put, are shown below. If transacted in a margin account with adequate free buying power to secure the put the net cash out-of-pocket would be just $1,892 as the money collected from the option sales can be used to help pay for the shares purchased. If held through expiration day there are just two possible outcomes. SCHW will ether finish at $35 or above, or below $35. If the former plays out, you'd get the best-case scenario below. Any move up of 4.8% or better would translate into a greater than 90% cash-on-cash total return in just 612 days (1.84-years). That annualizes at over 49%. That's as good as could be made by owning SCHW outright and seeing it climb to $63.73, without the addition of the options trades. How cool is that? Of course there's no guarantee that SCHW will be $35 by expiration day. If not, the worst-case scenario detailed below would take effect. Even then, the result would be far from scary. You'd need to pony up an additional $3,500 when put and be willing to own 200 shares of SCHW rather than just the original position size. The good news is that your average net cost would be just $26.42 per share. Any drop of less than 20.9% would mean you could sell immediately for at least a small gain. Schwab hasn't changed hands for as little as $26.42 since July of 2016, almost four full years ago. There you have it. Owning Schwab's share looks like a winning proposition. Shorting some LEAP puts could end up making you a nice profit, perhaps without ever having to actually own the shares. Setting up a full buy/write combination offers the chance for major gains while significantly reducing risk. Take you pick of any, or all, of the above choices. Schwab is now a high-quality, big cap name at a very reasonable price.

It's Time to Take Stock of Schwab

The long-term record of Charles Schwab tells of its future value; its current price does not.

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