Schwab Runs With the Bulls

07/20/2009 11:23 am EST


Jocelynn Drake

Financial Analyst, Schaeffer's Investment Research

Jocellyn Drake of Schaeffer’s Investment Research says the venerable discount brokerage firm is getting a lot of bullish support, but it’s fragile and could falter.

[A recent article in Barron’s, “Chuck’s Big Chance,”published July 13th—subscription required] takes a bullish look at the shares of Charles Schwab (Nasdaq: SCHW). The company is currently in the process of cutting prices, reducing minimum investments, and rolling out new products aimed squarely at luring customers.

Specifically, the company has slashed its minimum amount required to invest to just $100, compared with Vanguard's $3,000 minimum. Meanwhile, the firm is also seeking Securities and Exchange Commission approval to roll out its own family of exchange-traded funds.

The article opines that the security is "well-positioned to benefit from the confusion within Wall Street's broker community. And the stock looks pretty cheap, too." In fact, Paul Rasplicka, who manages AIM Capital Development Fund (ACDAX) and AIM Dynamics Fund (IDYAX), believes that the company is poised to impress with earnings. "The consensus sees 75 cents in 2009 and $1 in 2010—we think that's understated," Rasplicka says. In fact, he thinks earnings will beat expectations by at least 20%. Rasplicka likes the stock.

At $16.50 last week, the shares are trading at 17x earnings, and give a total market capitalization of $19 billion. Schwab, he says, ought to trade at a multiple of 20x, which would put the stock in the low $20s—at least 20% more than last week's price. (It closed just above $17 Friday—Editor.)

Optimism is on the rise toward the shares. The International Securities Exchange and the Chicago Board Options Exchange ten-day call/put volume ratio stands at 9.05. This ratio indicates that more than nine calls have been purchased to open for every one put purchased to open during the past ten trading sessions. This ratio is also higher than 97% of all those taken during the past 12 months, indicating rising optimism.

What's more, the Schaeffer's put/call open interest ratio for SCHW stands at 0.83, and is lower than 62% of all those taken during the past 12 months. Meanwhile, short interest dropped by more than 8% during the past month to fewer than 29 million shares. This accumulation of bearish bets accounts for only 3% of the company's float.

Technically speaking, the shares are currently being squeezed between resistance at their ten-week moving average and support at the 20-week trend line. Furthermore, the security is hitting resistance at its 20-month moving average—a trend line it has not closed a month above since October 2008. A rejection at these resistance levels could cause the bulls to unwind their long positions, creating fresh selling pressure.

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