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Can Investors Trust Charles Schwab (SCHW) Stock?

Alex Smith

Giverny Capital recently released its Q1 2020 Investor Letter, a copy of which you can download below. You should check out Giverny Capital’s top 5 stock picks for investors to buy right now, which could be the biggest winners of the stock market crash. There weren’t a lot of funds who could deliver these kinds of returns without shorting the market or using aggressive put options.

In the said letter, Giverny Capital highlighted a few stocks and Charles Schwab Corporation (NYSE:SCHW) is one of them. Charles Schwab is a financial services company. Year-to-date, Charles Schwab Corporation (NYSE:SCHW) stock lost 27.1% and on May 22nd it had a closing price of $32.83. Here is what Giverny Capital said:

"At Charles Schwab, the eponymous founder’s vision of delivering great service to individual investors at low cost has aged beautifully. Recently, Schwab cut most trading commissions to zero, a customer-friendly move that will cost it about 7% of annual revenue and some loss of profit. Less diversified competitors, however, faced the loss of up to 25% of revenue, a hit they could not afford. Schwab next agreed to buy top competitor TD Ameritrade in a deal that will create a technologically advanced firm serving both retail investors and registered investment advisors. Talk about making your own luck!

Schwab’s greatest asset today is not low costs, but investor trust. It has grown new brokerage accounts at about a 6% rate for years, and we don’t see that slowing. In fact, we believe Schwab has grown new brokerage accounts at an accelerating rate in March, even with most of its branch offices closed. The stock has been punished recently because its earnings likely will decline as interest rates trend toward zero – Schwab earns most of its profit from the interest margin spread it earns on customers’ cash deposits. But eventually interest rates will normalize above zero and Schwab will keep growing organically, so long as it maintains that bond of trust. It earned $2.67 per share in 2019. It may well earn less in 2020, but I feel sure the combination with Ameritrade will create a firm with significantly greater future earnings power."

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In Q4 2019, the number of bullish hedge fund positions on Charles Schwab Corporation (NYSE:SCHW) stock increased by about 19% from the previous quarter (see the chart here), so a number of other hedge fund managers seem to agree with SCHW’s growth potential. Our calculations showed that Charles Schwab Corporation (NYSE:SCHW) isn't among the 30 most popular stocks among hedge funds.

The top 10 stocks among hedge funds returned 185% since the end of 2014 and outperformed the S&P 500 Index ETFs by more than 109 percentage points. We know it sounds unbelievable. You have been dismissing our articles about top hedge fund stocks mostly because you were fed biased information by other media outlets about hedge funds' poor performance. You could have doubled the size of your nest egg by investing in the top hedge fund stocks instead of dumb S&P 500 ETFs. Below you can watch our video about the top 5 hedge fund stocks right now. All of these stocks had positive returns in 2020.

Video: Top 5 Stocks Among Hedge Funds

At Insider Monkey we leave no stone unturned when looking for the next great investment idea.  For example Europe is set to become the world’s largest cannabis market, so we check out this European marijuana stock pitch. We believe electric vehicles and energy storage are set to become giant markets, and we want to take advantage of the declining lithium prices amid the COVID-19 pandemic. So we asked astrophysicist Neil deGrasse Tyson about Tesla, Elon Musk, and his top stock picks. We read hedge fund investor letters and listen to stock pitches at hedge fund conferences. Our best call in 2020 was shorting the market when S&P 500 was trading at 3150 after realizing the coronavirus pandemic’s significance before most investors. You can subscribe to our free enewsletter below to receive our stories in your inbox:

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Disclosure: None. This article is originally published at Insider Monkey.