This Financial Stock Got Hammered in 2023 but Is Ready to Bounce Back

This past year was a challenging one for contrarian and value-focused investors alike. Mega-cap stocks with lofty valuations climbed relentlessly higher while Wall Street’s bargain bin collected dust throughout the year.

Among the beaten-down bargains of 2023 was Charles Schwab (NYSE:SCHW) stock. Commonly known as simply Schwab, the company is famous for its variety of managed and self-directed investment options and diversified array of exchange-traded funds (ETFs).

Yet, 2024 could be the year in which Wall Street finally appreciates a good value again. Schwab’s improving fiscal data and the more accommodative monetary-policy backdrop suggest the company may be a comeback candidate you can bank on in 2024.

Why SCHW stock lagged in 2023

Even among financial stocks, SCHW stock performed poorly last year. For example, shares of Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS) finished 2023 in the green while shares of Schwab lost 16%.

Some investors may be wondering why Schwab stock lagged its banking-sector peers. Bear in mind that Schwab isn’t as big as Goldman Sachs, Morgan Stanley and other financial giants. Consequently, when a crisis occurs, Schwab is viewed as particularly vulnerable.

It seems like forever ago now, but it was in March and April of last year when the last banking crisis took place. For a hot minute, the financial press showed photos of long lines at ATMs, and there was talk of impending bank runs.

Most banks survived the brief spate of panic withdrawals. Over-leveraged financial firms like First Republic Bank and Silicon Valley Bank floundered, but Schwab was never in any real danger of failing.

There was an issue with “cash sorting” at Schwab, however. Cash sorting refers to customers pulling their funds out of low-yielding banking and brokerage accounts, which are Schwab’s bread and butter, and into higher-yielding money-market accounts.

It makes sense that cash sorting would occur during a time when interest rates were rising and money-market accounts offered unusually high rates. Meanwhile, investors at that time feared that stocks would perform poorly in 2023.

During that time, Schwab was busy integrating the clients of TD Ameritrade, the trading platform it acquired several years ago. On top of all that, the Federal Reserve’s series of interest-rate hikes generally discouraged borrowing and lending activity — the lifeblood of financial institutions like Schwab.

As it turned out, Schwab did indeed experience an outflow of customer deposits. During the second quarter of 2023, Schwab’s bank deposits declined to $304 billion, versus $326 billion in the first quarter of 2023 and $442 billion in the third quarter of 2022.

An unappreciated recovery

In hindsight, it’s obvious that Schwab would survive the crisis of early 2023. The company took decisive action, announcing layoffs and other cost-cutting measures that would save at least $500 million per year, according to its estimate.

Furthermore, Schwab never engaged in high-risk activity, such as over-leveraging on bond funds or cryptocurrency, like First Republic Bank and Silicon Valley Bank did. Thus, Schwab was never truly at risk of failure, even with the cash-sorting issue.

In fact, Schwab is already showing improvement in the area of cash sorting. In November, the firm reported $21.7 billion in core “net new assets brought to the company by new and existing clients.” That’s nearly double the $11.3 billion what it reported in October.

For the most part, Wall Street responded to Schwab’s improvement with a yawn. Sure, SCHW stock perked up in the fourth quarter, but so did the stock market generally. The rising tide lifted Schwab’s boat, but not as much as it probably should have.

Schwab stock: A 2024-2025 story

This isn’t to suggest that Schwab’s cash-sorting problem is completely in the rear-view mirror. However, at least one prominent Wall Street expert envisions the firm’s issues resolving somewhat due to more accommodative monetary policy.

While Piper Sandler analyst Patrick Moley acknowledged Schwab’s “challenging 2023,” he optimistically sees the company as a “‘24/’25 story.” Like many experts, Moley expects the Federal Reserve to reduce interest rates multiple times this year.

“Should this [scenario of multiple interest-rate cuts] play out, we believe Schwab will benefit as lower rates would likely translate to a further slowdown and/or reversal in client cash sorting,” Moley predicted.

It makes sense then that lower yields for money-market funds should prompt customers to “sort” their cash back into Schwab’s brokerage accounts.

“In past cycles, client cash sorting has slowed significantly once the Fed begins cutting rates, and we’d expect a similar behavioral shift this cycle,” Moley added.

This certainly looks like a setup for SCHW stock to make a big move in the next 12 months and possibly even during the current quarter. At long last, investors should come to appreciate the true value of Schwab, a firm that survived a crisis that was never really as bad as it appeared.

Disclaimer: All investments involve risk. In no way should this article be taken as investment advice or constitute responsibility for investment gains or losses. The information in this report should not be relied upon for investment decisions. All investors must conduct their own due diligence and consult their own investment advisors in making trading decisions.