It’s Thursday, so I’m tasked with writing about a single stock exhibiting unusual options activity. A glance at Wednesday’s options trading immediately tells me that Charles Schwab (SCHW) is my subject for the day.
Regarding options volume yesterday, Schwab crossed 100,000 on the day, only the second time in June. Yesterday, its volume was 106,240. On June 7, it was 122,717. Its 30-day average daily volume is 76,126, 40% busier yesterday than its recent average.
You can make an excellent case of why SCHW -- its stock and options -- would be attractive to investors right now.
Here are three reasons why.
It Remains Popular With Investors
There’s no question that the regional bank crisis spooked investors interested in owning the country’s largest brokerage. Schwab’s bank deposits fell by 30% as nervous depositors took their money elsewhere.
It didn’t matter that CEO Walt Bettinger told the street in March that Schwab had enough liquidity should 100% of its deposits to walk out the door.
“There would be a sufficient amount of liquidity right there to cover if 100% of our bank's deposits ran off,” Bettinger told CNBC. “Without having to sell a single security.”
And even though he was playing fast and loose with his comment -- he meant that it had enough liquidity for its depositors to move their deposits elsewhere within Schwab and not out the door -- he was confident that it would be fine.
He made the above comment on March 23. Its stock has gone sideways in the three months since. While its stock hasn’t moved, it hasn’t had a problem attracting new clients and growing earnings.
In Q1 2023, it reported a 14% increase in profits, with a 10% jump in sales, exceeding analyst expectations.
“Schwab’s first-quarter earnings should put much of the concerns about the company to rest,” The New York Times reported comments by Michael Wong, director of equity research, financial services, at Morningstar.
Further, while Schwab saw deposits drop by 11% in the first quarter, it also experienced a 28% increase in clients holding money market funds, indicating that its customers weren’t headed out the door.
Equally important, it brought in $132 billion in net new assets in the first quarter, adding one million brokerage accounts.
It remains America’s financial supermarket.
Revenues Continue to Drop
You may wonder why I consider falling revenue to be a reason to invest in Charles Schwab stock. Bear with me as I explain.
On June 14, Schwab released its May 2023 highlights. Included with those highlights was Chief Financial Officer Peter Crawford. The CFO indicated that second-quarter revenue would decline by 10% to 11% from Q2 2022.
“The combination of a temporarily compressed NIM and a smaller interest-earning asset base, along with softer trading activity, is expected to drive a year-over-year decline in second quarter revenue of 10%–11%,” Crawford’s June 14 commentary stated.
In the near term, Schwab is being forced to rely on more expensive funding sources, which has reduced its net interest margin, leading to lower revenue. However, because most of its clients moved money within Schwab and not out the door, analysts at William Blair believe this issue will be much reduced by the third quarter.
Schwab’s total client assets as of May 31 were $7.65 trillion, 5% higher than a year ago and flat to the end of April. Most importantly, total client assets are higher than in the past 12 months.
The average Schwab client probably feels good with the markets continuing to do reasonably well. While that can change on a dime, a 10-11% revenue decline is not the end of the world for now.
Further, if it means that the stock falls a bit more when it reports its Q2 2023 results in July, even better for getting a good entry point.
Remember, Schwab’s trailing 12-month free cash flow is $7.95 billion. Based on its current market cap, it has a free cash flow yield of 8.3%. I consider anything above 8% to be in value territory.
The Put Option for Income
If you look at yesterday’s unusually active put options, the Schwab June 21/2024 $60 strike was the most active with a volume-to-open-interest ratio of 108.82x. The bid price was $9.35, a yield of 17.3%. Conveniently, the days to expiration were 365, so the annualized yield is also 17.3%.
As I write this on Thursday, SCHW is trading at $52.82. Were it to expire tomorrow, you’d have to buy the shares if you were selling some of these puts. Alas, it’s not expiring tomorrow but a year from now.
To avoid the shares being put to you, Schwab’s share price has to rise by 13.6% over the next year. It did that, and then some, in 2021. It went relatively sideways in both 2020 and 2022. It’s down 35% year-to-date, so there’s been a little of everything over the past 3.5 years.
However, if you’re like me and think Schwab is a good long-term buy, it wouldn’t be the worst thing in the world if you had to buy some Schwab stock at $60 in June 2024. After all, your net price paid would be $50.65. The last time it consistently traded below $50 was in 2020.
Scenario 1: You get an excellent income vehicle over the next year.
Scenario 2: You buy some Schwab stock at a reasonable price.
I can see why it was so popular yesterday.
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
