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An Undervalued Stock for the Trump Bump

Financials are flourishing after Donald Trump’s surprise election, and there’s one undervalued stock in the banking sector that’s looking quite attractive.

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Today, I have an undervalued stock pick in the financial sector that should benefit from our new President. But first, let’s talk about that elephant in the room—and how he’s impacting the market as a whole.

Stock Market at a Glance

Since the U.S. elections on November 8, a dramatic shift in the stock market has taken place thanks to expectations that President-elect Donald J. Trump will lead the country in quite a new direction from the path chosen by President Barack Obama.

Mr. Trump’s proposed policies will benefit some companies, but other companies will be unaffected or possibly even suffer because of the changes. President-elect Trump will attempt some or all the following:

  • Adjust tax rates for individuals and corporations.
  • Repeal or change Obamacare.
  • Renegotiate trade agreements.
  • Allow multinational companies to repatriate overseas cash at lower tax rates.
  • Spend heavily on infrastructure in the U.S.
  • Impose tariffs on some imports.
  • Reduce government restrictions on several industries, most notably banks and financial institutions.

In my November Cabot Benjamin Graham Value Investor, I recommended selling nine stocks. This is an unusually large number of stocks to sell within a three-week period. Because of the turnover in the market caused by the election of the new President, the selloff was necessary. Most likely, you are wondering, “What stocks should I sell and what stocks should I buy?”

Below, I recommend one outstanding possibility, and of course, in my advisory, you can find other great value stocks, which I believe will perform well if President-elect Trump enacts part or all of his new policies.

An Undervalued Stock in the Sizzling Financial Sector

I searched Standard & Poor’s database of 5,000 stocks to find companies in the financial sector with outstanding prospects. Banks, brokerages and insurance companies will benefit from rising interest rates, which have already begun to climb in anticipation of President-elect Trump’s campaign promises becoming enacted. Increased economic activity from a bump in infrastructure spending will help construction companies, industrial companies, financial companies and others. Financial company profits could also receive a boost if Mr. Trump reduces government restrictions on banks and financial institutions.

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Charles Schwab (Symbol: SCHW; Current Price: 37.48) is one of the largest brokerage firms in the U.S., primarily serving retail clients. Schwab engages in wealth management, securities brokerage, banking, money management and financial advisory services. The company provides financial services to individuals and institutional clients through two segments: Investor Services and Advisor Services.

Investor Services offers retail brokerage and banking services, retirement plan services and other corporate brokerage services. Advisor Services provides custodial, trading and support services. Schwab offers a range of products to address the investment and financial needs of individuals. Its product offerings include brokerage, mutual funds, ETFs, advice solutions, banking and trust.

SCHW

Charles Schwab depends on short-term interest rates, as nearly 40% of the company’s revenue came from net interest income in 2015 versus 37.5% in 2014. Earnings could rise noticeably after the Federal Reserve raises short-term interest rates (most likely beginning after the Federal Open Market Committee meets on December 13 and 14). I expect several rate increases in 2017, which will enhance earnings at Charles Schwab and other financial institutions.

Sales advanced 15% and EPS climbed 18% during the 12 months ended September 30, 2016. Growth accelerated in the recently reported third quarter with sales rising 20% and EPS surging 25%. Sales will likely rise 6% and EPS will advance 19% to 1.40 in the 12 months ending September 30, 2017. If interest rates rise at a faster pace during the next 12 months, sales and earnings could soar past estimates. The company’s 26.8 P/E (current price divided by current earnings per share) ratio is reasonable. Earnings will likely increase 12.0% per year during the next five years or more, making it an undervalued stock.

Schwab beat analyst estimates for sales and earnings in the last several quarters. Analysts have raised their forecasts for the next four quarters. Standard & Poor’s rates Schwab 5 stars (best) for outstanding total return prospects, and a Fair Value Rank of 4 (out of 5) for being an undervalued stock. I expect SCHW’s stock price to climb considerably during the next two years. Buy.

Until next time, be kind and friendly to everyone you meet.

J. Royden Ward has spent his entire career seeking strong investment returns for his clients while keeping risk low. In 1969, he developed a computerized model of stock selection based on formulas created by investment legend—and Warren Buffett mentor—Benjamin Graham, and since 2003, he’s been spreading his wisdom far and wide as chief analyst of Cabot Benjamin Graham Value Investor.