Please ensure Javascript is enabled for purposes of website accessibility
Free Article Join Over 1 Million Premium Members And Get More In-Depth Stock Guidance and Research

What Schwab's $0 Trades Mean for the Market

By Mac Greer - Oct 2, 2019 at 3:21PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Big picture, little picture, and the pictures in between, Schwab's no-fee move shakes up the trading world in a big way.

In this episode of MarketFoolery, host Mac Greer talks with analysts Emily Flippen and Andy Cross about some recent business news. What does Charles Schwab's ( SCHW -0.14% ) no-fee trade move mean for Schwab, its competitors, individual investors, and companies like Robinhood? Meanwhile, McCormick's ( MKC 0.93% ) earnings looked pretty tasty this quarter. How has this humble spice maker outperformed the market for so long?

Plus, they discuss some questions about China that have been popping up since last week, when Trump threatened to delist Chinese companies from U.S. exchanges. Could that happen? What would it mean for investors in Chinese companies? Tune in to hear more.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Oct. 1, 2019.

Mac Greer: It's Tuesday, October 1. Welcome to MarketFoolery! I'm Mac Greer and I am joined in studio by Motley Fool analysts Andy Cross and Emily Flippen. How are we doing today? Happy Tuesday!

Emily Flippen: Doing alright!

Andy Cross: Happy Tuesday! Start of the new quarter.

Greer: Start of the new quarter. Quite a start for McCormick. Spicy, spicy earnings. Andy, why didn't I buy this stock a long time ago? 

Cross: I don't know. You could have bought it for years and made very good money.

Greer: I know, and I still don't own it. We'll talk about that. We're also going to talk some China. Let's kick things off with Charles Schwab. Schwab announcing that it is eliminating online trading commissions for U.S. stocks, ETFs, and options. Previously, trades were $4.95. Starting October 7th, trades will be $0, as in free. Shares of Schwab down around 9% at the time of our taping. Andy, the ripple effect here -- E*Trade down around 60%, and TD Ameritrade down 23%. What does it all mean?

Cross: I will say, first of all, for all the individual investors who are listening, and members of The Motley Fool, this is fantastic news. We've been talking about the fact that there is a race to the bottom when it comes to commission trade fees. Interactive brokers have been leading it over the last couple years, lowering fees, and now Schwab, as they've moved down to below $5 and Fidelity has followed. Now, Schwab is really putting the gauntlet out there and going to $0 for U.S. and Canadian listed stocks and ETFs. For individual investors out there, this is great news. You should not be paying a lot, if anything, for your trades. Fantastic news.

Schwab is tying this together with the book that is coming out by Charles Schwab, who's still chairman, still owns 8% of the company. Worth more than $4 billion of the $50 billion plus company. His new book, called Invested, is coming out October 7th, so they decided to push the trade commission fee to zero.

As you said, this is having ripple effects. The other brokerage houses who have been following along this path over the years, as costs are going to zero, they're going to have to follow along. This is not big business for these companies anymore. The revenue that Schwab will lose is somewhere between 3% and 4% of their total revenues. These companies have moved much more to fee-based solutions for their brokerage holders. Schwab's one of the biggest out there. They have more than $3.7 trillion of assets. It's very meaningful in the market.

Greer: I want to push back a little bit. You say it's fantastic news, but when you eliminate all commissions, don't you encourage over-trading? And if you encourage over-trading, aren't you going to have more and more investors losing money?

Cross: You might. The metaphor I use is, just because I enjoy fat-free ice cream doesn't mean I have to eat a dozen tubs a night of fat-free ice cream. Don't go crazy. Certainly, don't over-trade. But, the fact that, to invest in businesses, we have to -- right now, at least -- use a brokerage, we shouldn't be paying to do that. For individual investors, Charles Schwab for decades has been leading this push to lowering costs, democratizing investing, as The Motley Fool has been doing for more than two decades. It's good news for individual investors who want to own businesses for the long term. Certainly, Mac, good point. Don't use it to over-trad. Please don't use it to over-trade. That's one of the worst things you can do for your portfolio returns. Forget the costs -- just trading in and out of stocks is not good for your returns.

Greer: And, taxes are a mess.

Cross: Yeah, taxes, but even if you were in a tax-free account or tax-advantaged account, over-trading is just bad for your investments because you tend to sell stocks at the wrong time and buy at the wrong time. Don't use this as an excuse to over-trade. But, certainly use it as an opportunity to try to lower your costs, to be able to invest in businesses for the long term.

Flippen: You can't emphasize that enough. I just had a member post on the boards today for Blast Off, a service I work on, saying that because the portfolio had been so squeezed -- the market, obviously, over the past month or two has been volatile, to say the least -- sold off almost 40% of his or her investments. That's a problem. So, if you have free trading, it might incentivize you to start doing stuff like selling when the stocks go down. That's not what you want to be doing. We're buy-and-hold investors. When you look at that average returns for individual investors versus the market, it's always lower, and that's usually attributable to the fact that people are very, very bad at timing the market. Very bad at making buying and selling decisions. The best thing you can do, as always, is to buy and hold. Hopefully, this just means that our members are now able to buy and hold for cheaper.

Cross: What's interesting about this from the market side, Mac, is that some of the other competitors to Schwab are down pretty significantly in the markets today. Schwab, from an expense to asset perspective, the amount of assets they have under management, and that their clients have with Schwab, is by far the most efficient. From the cost side, they can spread their costs and swallow the hit to the revenue better than most of the players out there, maybe other than interactive brokers. It's a real challenge to some of the other brokerage houses to get not just their revenue line from the commissions side, but continuing to use technology to improve the costs side.

Greer: Emily, before the taping, we were talking about some other potential competitors who aren't yet public, like Robinhood. I know a lot of millennials and a lot of newer investors and younger investors use Robinhood, and the big selling point there: free trades. What does this mean for Robinhood?

Flippen: I actually still think Robinhood is somewhat competitively positioned. Admittedly, they got their start by offering free trades when nobody else was. But, they did a great job of building out mobile platform when nobody else had it and pulling in an entire base of young users. People who otherwise never trade then had the ability to do so for a lot cheaper. I think it brought in a generation of investors that wouldn't have otherwise been in the market. I don't think Robinhood is, maybe, as competitively positioned as they were if everybody else was charging $5 per trade. But, I will say, I still like the business. I still think there's a sticky base of users. Admittedly, these users are younger. They're less lucrative than the users that big platforms have. Just something to keep in mind.

Cross: I will say, to Emily's point, I think Robinhood has a really nice, attractive offering for the type of clients they're bringing in. That's good. And they have brought investors into the market. Hopefully long-term investors. That's good news. I think this is a real challenge for them, though. I don't know what their private market valuation is today compared to what it was yesterday. I'm guessing it's a little bit lower. Schwab has 12 million active brokerage accounts, 1.7 million retirement accounts, more than $3.7 trillion under assets. There's a real big player out there, and they're getting more and more competitively advantaged with this move. And, the use of technology, and where they're pushing their own business to, when I look out long-term, I think those kinds of investments are going to pay off. That might be a little bit more of a challenge to someone like Robinhood than what it was a few years ago when they got started.

Greer: Let's move onto spices. McCormick flat-out getting it done once again. Shares up around 5% on earnings. Profits rising 11% for the quarter. Emily, that is a lot of Old Bay.

Flippen: [laughs] That is a lot of Old Bay. A lot of spices there, Mac. The real story here is operational efficiencies. McCormick's sales have actually had a sluggish start to the year. This growth in sales was small. Much smaller than its growth and earnings. That is to say, despite the fact that sales are -- I mean, they're steady. They're selling spices. They're doing their business. But they're really showing that they have operational efficiencies, stemming back to their 2017 acquisition of -- I'm going to butcher this -- Reckitt Benckiser, the Frank's hot sauce people. That's what I'm going to call them. I did go to our resident McCormick expert before coming in. Jason Moser gave me his insights. His thing was, McCormick, the reason why it's been such an amazing performer is, after that acquisition -- it was something like a $4 billion acquisition. It was extremely expensive, and people were concerned about the price McCormick paid to acquire them. And they've actually done a great job of integrating that. It's growing sales, getting operational efficiencies. His question was just, what's next? They need their next, newest, greatest acquisition. That might get the stock hammered again short-term like it did for Reckitt Benckiser; but, it also offers opportunity for them to grow sales and further improve efficiencies in ways that they haven't been able to yet.

Greer: Let me add that the brands -- a lot of us think McCormick and we look at all the spices, the spice racks -- but their McCormick brands include McCormick, French's, Gourmet, Grill Mates, Lawry's, Zatarain's, and [...]. They have a lot of different sub-brands within that McCormick umbrella.

Cross: When you look at McCormick's history -- we mentioned this at the top of the show, Mac -- it's been a wonderful stock performer. But it's one of those companies that, looking over the last five years, it's been able to grow revenues in the mid-single digits. You're talking 5% to 7%. But they get these efficiencies. They continue to have cost reductions, get a little bit more efficient on the distribution, a little bit more efficient on the manufacturing, they make these acquisitions. And you get a business that can grow their profits maybe twice that, maybe more along the lines of 10%. You buy these stocks at a reasonable price, when the market sells off like it did earlier this year after some earnings announcements, or after a big acquisition like that, and you have a chance to own a very solid, probably not as volatile stock in the market over many years. You just have to have the patience. It's not going to get the headlines that you might hear about from lots of the other, larger companies, especially the larger tech companies these days.

Greer: The stock, Andy, as you mentioned, has been incredible. In fact, if you're out and about tonight, you're hanging out with friends, or you're at home with your significant other or your spouse, here is a great conversation starter -- and by great, I mean conversation ender -- McCormick's stock has more than doubled over the last five years, and has beaten the market over the last one, five, 10, and 20-year periods. Andy, it's not the sexiest stock, unless market-crushing returns are sexy.

Cross: And they are sexy. They're certainly spicy. When you think about buying and holding that, the tax advantage behind that, instead of trading in and out of positions, just letting that company and that management do what they've done for many years. They have the brands. It's very profitable. They have great profit margins. A really good, solid company. Buy at the right price and hold on to it for the long term.

Flippen: I want to point out one thing in there, Mac. Look at the returns over one year. Beating the market. Within that same period, they had a drop of almost 20%. This is just a reminder to everybody, going back to the point of not over-trading -- these stocks will go up and down dramatically. And they can still be good long-term investments. When a stock like McCormick is down 20% because maybe they had a bad quarter, that's not your indicator, "Now I can sell for free. I'm going to sell, then buy again later." No. Just hold that company, and you'll get market-crushing returns.

Cross: You know what's amazing about that? If you look over the last five years, the volatility of McCormick's stock versus the market, it's much less volatile than the market. Emily, your point is so perfect. In between the course of certainly a day, but up to a year, any stock can be fairly volatile. But a company like McCormick over the long term tends to be less volatile than the market. For those investors out there who are just looking for companies to make money, generate returns for their portfolio, and maybe be a little less volatile, McCormick is a good way to go.

Greer: If I'm a McCormick shareholder, the stock goes down, and I can make a free trade. I shouldn't necessarily make that trade?

Flippen: You shouldn't.

Greer: OK. Do you have a favorite spice?

Cross: I love Old Bay. I live in Maryland. Old Bay and crab. That's the connection right there for me.

Flippen: I'm obsessed right now with black pepper. I'm putting that on everything.

Greer: [laughs] You say that as if you just recently discovered black pepper.

Flippen: [laughs] No! Normally I would sprinkle it. I am eating food that is majority flavored with black pepper right now.

Cross: Do you grind it yourself?

Flippen: I have one that you grind, and I have McCormick just black pepper spice. The one that's ground is a little too peppery.

Cross: It's not consistent.

Flippen: Yes, exactly.

Cross: I was telling you earlier, I can't get my kids to eat pepper, and it's driving me bonkers.

Flippen: Your kids are very young!

Cross: If you have any advice out there, how to get my kids to enjoy spicy food --

Greer: I don't mean to pepper you with questions here, but why is getting your kids to eat pepper --

Cross: Because, Mac, I love spicy food, and I want them to appreciate the nuances of spicy food. And they just are not doing it. So, if you have any advice out there, please let me know.

Greer: My advice is to let them live their own lives. It's not about you.

Cross: If anybody out there besides Mac has good advice for me --

Greer: Your glory days are over.

Cross: That's true. They're long over.

Greer: [laughs] Don't take that from me, I'm older than you! That's such a cheap shot!

Cross: Not by much, man.

Greer: Yeah, by a lot. OK, let's close with a couple of listener questions on China. Emily, reports last week that the White House was considering delisting Chinese companies from U.S. stock exchanges. Over the weekend, a Treasury spokeswoman said the administration is not considering delisting Chinese companies, quote, "at this time." We got a couple of listener questions on that front.

Kathy owns a number of Chinese stocks that The Motley Fool has recommended. Her question was, "If Trump forces the delisting, am I forced to sell?" We also got a question Twitter from Andy W., asking how a forced delisting would affect his ownership of those companies.

Flippen: I will say, Mac, when this news came out last Friday, I saw it and I just quit for the day. [laughs] I broke out the box of wine a little bit earlier than I normally would have --

Cross: [laughs] The box of wine!

Flippen: -- just called it a day.

Greer: Was there some black pepper?

Flippen: [laughs] Some black pepper in the white wine, yeah. No, no. I do at this point believe that Trump is out to personally get my portfolio. But I guess now, other investors are starting to feel what I've been feeling for a while.

Greer: We're not a political show.

Flippen: [laughs] I will say this -- it's great that they cleared up that statement. The NASDAQ, for instance, is a private company. The idea of an administration forcing the delisting of companies would really be unprecedented. To the extent that they could do that, it would have to be done in a regulatory manner.

Now, the concern with Chinese companies in particular, other than these companies just being used as a political tool, is the idea that they're not being held to the same accountability standards that American companies are. There are easier regulatory ways to get them to maybe use a U.S.-based auditor, for instance, as opposed to using Chinese auditors. That's a lot easier to do than forcing all these companies to delist.

I will just say, an act like this would be extremely unlikely, and I think that's an overstatement, saying unlikely. It's virtually impossible. All of these Chinese companies are incorporated in the Cayman Islands. There are a lot of other foreign companies that are also incorporated in the Cayman Islands. Are you going to therefore ban all companies incorporated in the Cayman Islands? You're inadvertently preventing the listing of other companies.

But, let's just say -- I don't think it's possible, but say, in a theoretical world, this did happen, and all these Chinese companies are forced to delist from American exchanges. Obviously, this depends on the regulations that were put into place. Clearly, we didn't get any color about that, but if I can just ponder for a moment what that might look like ... it could mean that these companies would be forced to move to over the counter markets. It's also possible that over the counter markets would also be regulated. If that were the case, what would likely happen is, these companies would then choose to list on a foreign exchange -- Hong Kong Stock Exchange, London Stock Exchange, a different exchange. How they would handle that would likely be to retain your share ownership on a foreign exchange. Then it goes onto your broker, about how they're going to support that. If not, then it's possible that you would essentially be forced to sell your shares.

Again, I don't think something like this is going to happen. It's not a factor when I think about buying these companies. A lot of investors are seeing our personal portfolio is being used as a political tool right now in what is increasing tensions between the U.S. and China.

Cross: I agree with Emily. I think the chances are slight. Not very high, at least. Again, Mac, it's another example -- you see so much, especially these days, a lot of headlines out there that drive short-term day trading, essentially. We want to make sure investors out there who are listening, truly Motley Fool investors, understand that you take the news headlines, but you have to digest them. You have to understand what it means [for the long term].

Greer: But what if trades are free now?

Cross: [laughs] Well, trades are going free, Mac. At least at one brokerage house right now, and probably others are going to follow. It does not mean you have to trade, obviously. All jokes aside, you want to make sure, when you see headlines like this -- we know they're out there -- take a perspective that is healthier than just a day. Preferably, three to five years.

Greer: OK, desert island question. We don't have a lot of stocks on this show. We could create some basket of Chinese-listed companies. Or, we could just say, you're on a desert island for the next five years. You're looking at McCormick, or Schwab, or, I don't know, black pepper? Let's go McCormick or Schwab.

Cross: I can't say black pepper because I can't get my kids to eat it. I'm saying Schwab. It's a large-cap company, but the scale they're building out, and the rate and the size they're doing it at, I think is really impressive. Exceptionally well-run. Very profitable with good returns on equity and cost basis. Low cost base that's getting cheaper as they use technology. At some point, if interest rates start to move in the other direction, that's going to be good news for Schwab shareholders.

Flippen: I'll say McCormick, actually. One thing we didn't mention is, McCormick has, it's a low dividend, but it's a pretty steadily paid dividend, which is nice for investors. I personally think I consume enough black pepper to keep this company in business for the foreseeable future.

Greer: [laughs] As always, people on the show may interest in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. Andy and Emily, thanks for joining me! That's it for this edition of MarketFoolery. The show is mixed by Dan Boyd. I'm Mac Greer. Thanks for listening, and we will see you tomorrow!

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis – even one of our own – helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

The Charles Schwab Corporation Stock Quote
The Charles Schwab Corporation
$81.20 (-0.14%) $0.11
McCormick & Company, Incorporated Stock Quote
McCormick & Company, Incorporated
$88.65 (0.93%) $0.82

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 12/08/2021.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Our Most Popular Articles

Premium Investing Services

Invest better with the Motley Fool. Get stock recommendations, portfolio guidance, and more from the Motley Fool's premium services.