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The Charles Schwab Corporation’s (SCHW - Analyst Report) strong advisory segment and its low cost structure positions it much ahead of its peers. The stock closed at $24.83 on Dec 2, reflecting a solid year-to-date return of 66.6%.

Schwab’s diversified revenue streams and initiatives taken to become less dependent on interest rate raises expectations of the stock’s price appreciation going forward. Given these factors, it seems that keeping the company’s shares in your portfolio would not be a bad idea.

However, since lower trading activity, flattish market performance and Schwab’s high dependence on fee-based revenue streams continue to be challenges, we discourage further addition of its shares to your portfolio.

Justification of Stance

Schwab’s third-quarter 2013 earnings per share of 22 cents beat the Zacks Consensus Estimate by 10.0%. Moreover, this compared favorably with 19 cents earned in the year-ago quarter.

Schwab’s aggressive efforts to increase clients in advisory solutions have been successful. For the nine months ended Sep 30, 2013, advice solutions fees increased 22.5% to $523 million. Further, the company’s decent capital position enables it to disburse regular payouts to shareholders. The company presently targets its cash dividend in the range of 20%–30% of net income.

Additionally, the Zacks Consensus Estimate has seen upward revisions over the last 60 days. For 2013, the Zacks Consensus Estimate advanced 2.7% to 76 cents while for 2014, it increased 3.4% to 91 cents. Hence, the company now carries a Zacks Rank #2 (Buy), indicating short-term upside potential.

On the flip side, Schwab’s business model is highly sensitive to interest rates. Low rates have been a drag on its revenues, forcing the company to waive fees charged to clients for managing funds. Until the economy recovers and interest rates improve, we expect this challenge to persist for the company.

Moreover, there are lingering concerns about Schwab’s declining trend in Daily Average Trades and its significant dependence on fee-based revenues.

Other Stocks to Consider

Other investment brokers worth considering include Ladenburg Thalmann Financial Services Inc. (LTS - Snapshot Report), Evercore Partners Inc. (EVR - Snapshot Report) and Interactive Brokers Group, Inc. (IBKR - Analyst Report). While Ladenburg Thalmann Financial Services carries a Zacks Rank #1 (Strong Buy), Evercore Partners and Interactive Brokers hold the same Zacks Rank as Schwab.

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