This financial stock took a hit in 2023, but is poised to bounce back

The past year has been difficult for both contrarian and value-focused investors. Overvalued large-cap stocks rose relentlessly, and Wall Street’s bargain bins gathered dust all year long.

Among the stocks that declined in 2023 was Charles Schwab (NYSE:SCHW) stock. Commonly known as Schwab, the company is known for its variety of managed and self-directed investment options and a variety of exchange-traded funds (ETFs).

But 2024 could be the year that Wall Street finally sees good valuations again. Schwab’s improving financial data and more accommodative monetary policy backdrop suggest the company could be a promising comeback candidate in 2024.

Why SCHW stock price is sluggish in 2023

Among financial stocks, SCHW stock showed poor performance last year. For example, shares of Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) ended 2023 in the green, while shares of Schwab were down 16%.

Some investors may wonder why Schwab stock is lagging its banking sector peers. Keep in mind that Schwab is not as big as Goldman Sachs, Morgan Stanley, and other financial giants. As a result, Schwab is considered particularly vulnerable if a crisis occurs.

It seems like a long time ago now, but the last banking crisis occurred in March and April of last year. For a while, the financial press showed pictures of long lines at ATMs and there were talks of an imminent bank run.

Most banks survived the temporary withdrawal panic. While overleveraged financial companies like First Republic Bank and Silicon Valley Bank struggled, Schwab was never really in danger of failing.

But Schwab had a problem with “cash classification.” Cash triaging means customers withdraw funds from low-yield bank and brokerage accounts, which are Schwab’s bread and butter, into high-yield money market accounts.

At a time when interest rates are rising and money market accounts are offering unusually high interest rates, it’s natural that cash triage will occur. Meanwhile, investors at the time were concerned that stock prices would be sluggish in 2023.

During that time, Schwab has been busy consolidating customers of TD Ameritrade, a trading platform it acquired several years ago. Among other things, the Federal Reserve’s series of interest rate hikes have dampened borrowing and lending activity, which is typically the lifeblood of financial institutions like Schwab.

As it turns out, Schwab actually experienced an outflow of customer deposits. During the second quarter of 2023, Schwab’s bank deposits decreased to $304 billion, compared to $326 billion in the first quarter of 2023 and $442 billion in the third quarter of 2022.

unrecognized recovery

Looking back, it’s clear that Schwab will survive the crisis in early 2023. The company has taken decisive steps, including announcing layoffs and other cost-cutting measures that could save it at least $500 million annually, according to estimates.

Additionally, Schwab has never engaged in high-risk activities, such as excessive borrowing in bond funds or cryptocurrencies, like First Republic Bank and Silicon Valley Bank. So even though Schwab has had cash classification issues, it has never really been at risk of failure.

In fact, Schwab is already seeing improvements in cash classification. In November, the company reported that “core net new assets brought to the company by new and existing customers” amounted to $21.7 billion. This is almost double the $11.3 billion reported in October.

For the most part, Wall Street reacted to Schwab’s improvement with a yawn. Sure, SCHW stock was up in the fourth quarter, but so was the stock market overall. The rising tide lifted Schwab’s boat, but not as much as expected.

Schwab Stock: The 2024-2025 Story

This doesn’t mean Schwab’s cash classification problems are entirely in the rearview mirror. But at least one prominent Wall Street expert expects more lenient monetary policy to solve some of the company’s problems.

Piper Sandler analyst Patrick Moley acknowledges Schwab’s “challenging 2023” but is optimistic about the company’s “’24/’25 story.” Like many experts, Morley expects the Federal Reserve to cut interest rates several times this year.

“If this rate cut scenario were to play out, we believe Schwab would benefit because lower interest rates would likely further slow or reverse customer cash assortments,” Moley predicted.

It makes sense, then, that the low returns of money market funds would encourage clients to “classify” their cash into brokerage accounts at Schwab.

“In past cycles, customer cash sorting has slowed significantly once the Fed starts cutting interest rates, and we expect to see a similar behavioral shift this cycle,” Moley added.

This certainly looks like a setup for SCHW stock to make big moves over the next 12 months, and possibly even during the current quarter. Investors may finally recognize the true value of Schwab, a company that survived a crisis that wasn’t as bad as it seemed.

disclaimer: All investments involve risk. Under no circumstances should this article be taken as investment advice or constitute liability for investment profits or losses. The information in this report should not be relied upon for investment decisions. All investors should conduct their own due diligence and consult their own investment advisors when making trading decisions.