Cathie Wood's ARK Investment Management focuses on companies that are involved in "disruptive innovation." Generally speaking, these stocks have amazing potential and trade with multiples reflecting that. Finding stocks that fit in the category of disruptive innovation while trading at a reasonable multiple to earnings is much more difficult. One such stock that fits the bill is Charles Schwab (SCHW 0.38%), which is indeed an ARK holding.
The original financial disruptor
Charles Schwab's history is one of disruptive innovation. Prior to the 1970s, stock brokerage commissions were highly regulated, and it wasn't unusual for an investor to pay hundreds of dollars in commissions and bid/ask spreads in order to trade a stock. On May 1, 1975 (known on Wall Street as May Day), brokerage commissions were de-regulated and commissions fell as banks began to compete for clients.
Charles Schwab was the first discount broker. It offered cut-rate commissions and didn't offer many of the services that its competitors did (especially research and underwriting). This unleashed a wave of commission-cutting that has culminated in platforms like Robinhood, which charge nothing to trade.
Today, Charles Schwab is a savings and loan company that offers wealth management, brokerage, banking, asset management, custody, and financial advisory services. As of Dec. 31, 2020, the company had $6.7 trillion in client assets, with 29.6 million brokerage accounts, 2.1 million corporate retirement plan participants, and 1.5 million bank accounts.
Schwab has been bulking up
Charles Schwab has been active in the mergers and acquisitions space, acquiring USAA Investment Management Company in May of 2020. In October 2020, it completed its acquisition of TD Ameritrade, which will help add scale and improve the company's offerings.
Falling interest rates negatively affected the company's revenue last year, as interest income fell 18% in 2020 versus 2019. Net interest revenue accounted for 52% of Schwab's net revenue in 2020 versus 61% in 2019. Trading revenue rose 88% as trading volumes rose overall. Finally, asset management fees and exchange-traded fund income rose 8% on a year-over-year basis. Earnings per share fell 21% on a year-over-year basis, which was driven by falling interest rates and increased merger costs.
Robo advisors are replacing human brokers
The financial planning business is becoming more and more technologically driven as robo-advisors and apps replace human brokers and advisors. Schwab was one of the leaders in this category: Its Intelligent Portfolios service has been around since 2015. As stock trading basically becomes free, technology is necessary to cut costs. That said, investors who need more specific advice can always talk to a Schwab certified financial planner.
Cathie Wood's ARK Investment Management's focus on emerging technology and potential disruption means that many of its stocks tend to be high-multiple companies like Tesla. That might be a fantastic company, but with a triple-digit 2021 price-to-earnings multiple, it hardly qualifies as a value stock. Charles Schwab, on the other hand, trades at 22 times expected 2021 earnings per share, which is a bit more reasonable. That said, financial stocks invariably trade at low multiples, so it is important to keep in mind peer multiples.
Schwab also pays a dividend, although it is on the low side, with a 1% yield. The dividend is amply covered, however, with the company paying out 23% of earnings per share as dividends. Schwab may not have the sizzle of a Tesla, but it is a Cathie Wood stock with an easier-to-stomach multiple. Value investors should take note.