Financial stocks were hit hard during the recent market correction, as investors’ worries about an economic recession, the direction of interest rates and bank liquidity caused selling in the sector.
But, the fog is now clearing. I’ve repeatedly reminded investors that we are, indeed, in a slow-growth economic phase—a phase that accounts for both the ongoing manufacturing recession and the offsetting increases in consumer spending.
Wage hours and wage dollars-per-hour have been rising. As a result, consumers have been spending money on non-recessionary purchases such as housing, autos, healthcare, travel, entertainment and investments.
Unfortunately, financial markets are occasionally driven by worried investors. If investors are panicked, they sell their stock mutual funds. Even though stock portfolio managers are far more aware of the slow-growth economic data, they are stuck catering to the worried investors. They are forced to sell excellent stocks in their portfolios in order to meet the mutual fund redemption requirements, thus driving stock prices downward.
Think of it like a child being in charge of selecting the family’s dinner menu: the parents want healthy foods, but the child wants candy. In the case of mutual funds, the children can wreak havoc in the stock market over the short term.
Eventually, investor panic subsides, either because they’re done switching out of their stock funds into money market funds or because they are hearing good economic news reports and letting go of their anxieties. Good news continues to emerge from the housing and auto markets, more recently joined by stabilizing oil prices. I would not be surprised to see crude oil at $38 per barrel this spring!
The Federal Open Market Committee (FOMC) is still planning to increase interest rates three times in 2016—a move they would not take if the U.S. were diving into an economic recession.
Buy-Low Opportunities in the Stock Market’s Recovery
Let’s look at buy-low opportunities during this onset of the U.S. stock market recovery.
CHARLES SCHWAB (SCHW)
The Charles Schwab Corporation (SCHW) is a financial services company, focused on banking, investment management and investment advice. As the economy grows—and make no mistake, it is growing—consumers not only have more money to spend but they have more money to invest, too.
Schwab currently oversees $2.5 trillion in client assets. Profit margins are expected to increase significantly in 2016 and 2017. Wall Street analysts expect Schwab’s earnings per share (EPS) to grow aggressively at 27.8% and 25.0% in 2016 and 2017 (December year-end). Earnings growth is coming from asset management fees, higher net interest income, clients moving cash into equities and increasing their use of Schwab’s new trading platforms.
As the Federal Reserve continues to increase interest rates, Schwab benefits by earning a higher margin on its clients’ cash deposits. Net interest income accounted for 40% of the company’s profits in 2015. So you can see that brokerage industry stocks can be volatile when the direction of interest rates is in question—and profitable when interest rates are rising.
20% Profit in the Short-Term
Schwab’s price/earnings ratio (P/E) is 21.5, which is distinctly below both this year’s and next year’s earnings growth rates. During the last five years, the stock traded at a P/E between 15 and 35, so there’s lots of room for P/E expansion before analysts would consider the stock to be overvalued.
The stock offers a dividend yield of 0.9%. The company has a low long-term debt-to-capitalization ratio of 18%, which indicates a strong balance sheet.
SCHW reached an all-time high of 35.72 in August 2015, then suffered with the two subsequent stock market corrections. SCHW has begun its rebound. There isn’t much stopping the stock price from reaching upside price resistance at 32 before June. New buyers could conceivably earn 20% profit in the short-term.
SCHW is an undervalued, large-cap aggressive growth stock. It should appeal to both growth stock investors and to traders who have a two-week to 12-week time frame.
I would buy now, since the stock is done with its post-correction stabilizing phase.
Chief Analyst, Smart Investing in Turbulent Times