The Charles Schwab Corporation (SCHW) in Westlake, Tex., has come a long way from small discount brokerage to operator of a leading investment services company and a leader in asset management and retirement planning. Its stock has soared 15.8% in price over the past month to close yesterday’s trading session at $81.54, after hitting its all-time high of $81.63. 

The surge can be attributed mainly to its solid third-quarter results. In addition, a pandemic-driven boom in retail trading has contributed to its business.

However, in August 2021, SCHW’s Chairman Charles Schwab sold 70,000 shares for gross proceeds of more than $5 million. And the company’s near-term outlook looks uncertain, owing to concerns regarding the pace of economic recovery, high inflation environment, and global market disruption. Furthermore, it is also being investigated for possible violations of securities laws.

Here are the factors that we think could shape SCHW’s performance in the coming months:

Better-than-expected Third Quarter Results

SCHW’s net revenues increased 86.7% year-over-year to $4.57 billion for the third quarter, ended September 30, 2021. The company’s total client assets were $7.61 trillion, representing a 73.2% year-over-year rise. Its non-GAAP net income increased 129.9% year-over-year to $1.72 billion, while its non-GAAP EPS came in at $0.84, up 64.7% year-over-year.

Ongoing Investigation

Several law firms have launched an investigation into SCHW on possible violations of federal securities laws and potentially related corporate mismanagement. On July 2, 2021, the company said it would take a $200 million charge in the second quarter related to a U.S. Securities and Exchange Commission probe of its Robo-adviser platform. The compliance inquiry relates to past disclosures around its Schwab Intelligent Portfolios product.

Stretched Valuation

In terms of forward non-GAAP P/E, SCHW’s 24.93x is 116% higher than the 11.54x industry average. Likewise, the stock’s 8.23x and 2.85x respective forward P/S and P/Bare higher than the 3.42x and 1.20x industry averages. And its 27.59x forward P/CF  is 155.5% higher than the 10.80x industry average.

POWR Ratings Reflect Uncertainty

SCHW has an overall C rating, which equates to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 distinct factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight distinct categories. SCHW has a C grade for Growth, which is in sync with analysts’ expectations that its revenue and EPS will decrease 1.2% year-over-year for the quarter ending March 31, 2022.

The stock has a C grade for Stability, consistent with its 1.02 beta. Moreover, SCHW has a D grade for Value, which is in sync with its higher-than-industry valuation ratios.

In addition to the POWR Rating grades I’ve just highlighted, we’ve also rated the stock for Quality, Momentum, and Sentiment. Get all the SCHW ratings here. Also, SCHW is ranked #21 of 22 stocks in the B-rated Investment Brokerage industry.

Bottom Line

Primarily impressive third-quarter results helped SCHW’s shares hit their all-time high yesterday. However, the stock looks significantly overvalued at its current price level. So, we think it could be wise to wait for better entry points.

How Does Charles Schwab (SCHW) Stack Up Against its Peers?

While SCHW currently has a C grade in our proprietary rating system, one could check out these A-rated (Strong Buy) industry peers: Manning & Napier, Inc. (MN) and Piper Sandler Companies (PIPR).

SCHW shares rose $0.06 (+0.07%) in premarket trading Wednesday. Year-to-date, SCHW has gained 55.01%, versus a 21.71% rise in the benchmark S&P 500 index during the same period.

Since she was young, Manisha has had a strong interest in the stock market. She majored in Economics in college and has a passion for writing, which has led to her career as a research analyst.

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