Charles Schwab Stock Has An 84% Upside Potential To Its Pre-Inflation Peak

Charles Schwab stock (NYSE: SCHW) currently trades at $52 per share, around 46% below (84% upside) its level of $96 on January 15, 2022 (pre-inflation shock high), and seems like a good investment opportunity. Charles Schwab saw its stock trading at around $63 at the end of June 2022, just before the Fed started increasing rates, and is still 18% below that level. In comparison, the S&P 500 gained about 11% during this period. The stock price has suffered over recent months due to the fear of a banking crisis after the collapse of Silicon Valley Bank (SVB). This was despite a decline in the inflation rate in response to the Fed’s aggressive rate hike plan and consistent growth in Charles Schwab’s revenues. 

Returning to the pre-inflation shock level means that SCHW stock will have to gain more than 84% from here. However, we do not believe that will materialize any time soon, and estimate Charles Schwab’s valuation to be around $66 per share. This is because the recent uncertainty in the financial sector has made investors concerned about a potential recession. 

Our detailed analysis of Charles Schwab’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022 and compares these trends to the stock’s performance during the 2008 recession.

2022 Inflation Shock

Timeline of Inflation Shock So Far:

• 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
• Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt the supply
• April 2021: Inflation rates cross 4% and increase rapidly
• Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process
• June 2022: Inflation levels peak at 9% – the highest level in 40 years. S&P 500 index declines more than 20% from peak levels.
• July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline 
• Since October 2022: Fed continues rate hike process; improving market sentiments help S&P500 recoup some of its losses

In contrast, here’s how SCHW stock and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

SCHW and S&P 500 Performance During 2007-08 Crisis

SCHW stock declined from nearly $22 in September 2007 (pre-crisis peak) to below $13 in March 2009 (as the markets bottomed out), implying SCHW stock lost almost 43% of its pre-crisis value. It recovered post the 2008 crisis to levels of around $19 in early 2010, rising 48% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.

SCHW Fundamentals Over Recent Years

SCHW revenues increased 9% from $10.7 billion in 2019 to $11.7 billion in 2020 due to higher trading volumes. Further, revenues jumped 58% in 2021, partly due to organic growth and partly because of the acquisition of TD Ameritrade. The trend continued in 2022, with top-line increasing by 12% y-o-y.

Similarly, earnings increased from $2.69 in 2019 to $3.52 in 2022 driven by revenue growth. However, SCHW reported a $2.13 per share earnings in 2020, down y-o-y, when the pandemic impacted its expenses. 

Conclusion

With the Fed’s efforts to tame runaway inflation rates helping market sentiments, we believe Charles Schwab (SCHW) stock has the potential for strong gains (84% upside) once fears of a potential recession are allayed.

What if you’re looking for a high-performance portfolio with a low downside instead? Here’s a reinforced value portfolio that has beaten the market consistently while limiting losses during periods of sharp market declines.

[1] Month-to-date and year-to-date as of 5/23/2023
[2] Cumulative total returns since the end of 2016

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