Why Schwab Stock Just Broke an 8-Day Losing Streak

What happened

At long last — some good news for investors in Charles Schwab (SCHW 2.44%).

For eight long days, Schwab stock has gone nowhere but down. Since paying out its quarterly dividend ($0.25 per share, or a dividend yield of 1.8% if you’re interested) on Aug. 10, Schwab’s shares have shed 12.5% of their value. This sell-off culminated in a big 5% drop yesterday after the company announced it is laying off employees and taking charges of as much as $500 million to pay for it.

But then, a miracle happened — and now Schwab stock is up 2.4% as of 2:24 p.m. ET.

So what

This morning, Deutsche Bank analyst Brian Bedell stepped into the bedlam and declared that Schwab stock’s sell-off is actually a buying opportunity for investors.  

On the one hand, sure, laying off employees is not usually considered a sign of glowing financial health at a company. And reinforcing the impression that Schwab is struggling, the company announced last night that it is taking out $2.35 billion in new debt to carry it through the tough times. But concerns over these developments, says Bedell, are “overblown” — especially given that the stock has now fallen enough to probably price in the risks.

Now what

I’m inclined to agree. For one thing, on its face Schwab stock looks kind of cheap. At current prices, the stock sells for barely 16 times earnings — not bad for a stock for which analysts are projecting 13% annualized earnings growth over the next five years, and paying a near 2% dividend.

For another, what problems Schwab has are believed to be short-term in nature. While a recently rocky stock market and rising interest rates have analysts thinking this stock broker will earn less profit this year than it did last year, forecasts call for earnings to rebound sharply to nearly $4 per share next year (giving the stock about a 14.5 forward P/E ratio). And earnings could rise another 50% or more over the three years after that — which by my math works out to even better than the 13% consensus growth rate of Wall Street analysts.

Granted, Schwab stock isn’t a deep-discount bargain just yet. This is not a situation where investors will be able to “buy dollar bills for $0.50,” as the saying goes. But when seeking to own a quality stock broker name like Schwab, any bargains are likely to be few and far between. If you ask me, this one looks good enough to click the buy button.

Charles Schwab is an advertising partner of The Ascent, a Motley Fool company. Rich Smith has no position in any of the stocks mentioned. The Motley Fool recommends Charles Schwab and recommends the following options: short September 2023 $47.50 puts on Charles Schwab. The Motley Fool has a disclosure policy.

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