Today’s lesson from Chuck: The term “financial services” covers a lot of different businesses; investors who lump all companies in the industry together will inevitably skip over investing opportunities. Motley Fool Stock Advisor pick Charles Schwab
Schwab’s growth in net new client assets has decreased significantly, but we are talking growth here: Assets continue to walk through the door. Schwab clients were even net buyers of equity mutual funds throughout the quarter.
(A bear market has a number of effects on brokerage profits, not all of which are negative. On the one hand, investors tend to withdraw from the stock market; on the other, stock price volatility promotes trading activity. It’ll be interesting to see the same metrics for the current quarter, now that we have officially entered bear territory.)
One other note: Schwab started offering mortgage loans in 2003, and it has done so conservatively. Where traditional lenders such as JPMorgan Chase
All in all, this quarter is more proof that the man with his name on the door has done a terrific job turning this firm around since he returned as CEO in 2004. What of the stock? The following table suggests to me that Schwab is more attractive than its two closest competitors for a risk-averse investor (suggests only – the burden of proof is a lot higher).
Company |
FY 2009 P/E Ratio |
Market Value/ Total Client Assets |
---|---|---|
Charles Schwab |
14.9 |
1.7% |
E*Trade Financial |
N/A |
0.8% |
TD Ameritrade |
11.6 |
3.2% |
Sources: Yahoo! Finance, company reports.
As a turnaround, E*Trade is probably a higher-risk proposition. And, although I wouldn’t call Schwab outrageously cheap right now, it is a high-quality franchise which deserves a premium earnings multiple over TD Ameritrade. So let’s repeat Chuck’s lesson for the day: An online brokerage is a much lower-risk business than an investment bank -- investors could do a lot worse than taking a look at Schwab.
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