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Bull of the Day: Charles Schwab (SCHW)

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With the prospect of higher interest rates increasing each day, investors are slowly starting to position their portfolios in order to benefit from the likely trend. This results in a focus on the financial sector, since many banks benefit from a higher interest rate differential, as they make money off of the spread between the long and short term rates.

However, one area that investors often forget to think about as a rising rate beneficiary is that of the investment broker space. Investment brokers take uninvested capital in client accounts and use it to purchase a variety of ultra short-term securities. Right now, these securities earn a very low yield, but obviously as rates increase the income goes up as well. This can actually make a substantial portion of a broker’s income, so higher rates are often seen as crucial to better earnings for companies in this sector.

But with rates slowly on the rise, optimism is definitely in the air for this corner of the market. That is part of the reason why the sector has a top 20% industry rank, and why just one of nearly two dozen companies has a ‘strong sell’ rank right now. On the other side of the coin, there are about 10 companies in the segment that have a Zacks Rank of ‘buy’ or better, so how do you decide where to place your bets in this promising corner of the market?

Talk to Chuck

Well, one company that should definitely be on your radar in this market is Charles Schwab (SCHW - Free Report) . The company was actually just upgraded into ‘Strong Buy’ territory within the past week so it could be an excellent time to jump in to this top stock.

This is especially true given the recent earnings estimate revision activity for SCHW, as analysts have been racing to upgrade their estimates for the company. In just the past thirty days, we have seen five estimates go higher for the current quarter, compared to zero lower. And for the current year, we have seen ten estimates go higher in the past month, and three higher in just the past week. Once again, this is compared to zero lower.

These rising estimates are now baking in an EPS growth rate of over 33% for both the current quarter and the current year, which is pretty substantial given SCHW’s size. Meanwhile analysts are also anticipating a double digit percentage increase in revenues as well so it appears as though Schwab is on a nice momentum path.

But before you start to worry about SCHW living up to analyst expectations, consider their recent performances in earnings season. The company has only missed estimates once since the summer of 2013, and it is riding a streak of six straight beats.

SCHWAB(CHAS) Price, Consensus and EPS Surprise

SCHWAB(CHAS) Price, Consensus and EPS Surprise | SCHWAB(CHAS) Quote

Bottom Line

Clearly, this is a top-notch company that deserves your consideration heading into 2017. The overall sector is promising, the rate environment favors brokers, and we have seen some M&A activity as well.

So, trust in the rising earnings estimates—as well as the unanimous positon among analysts that the picture is getting better—and consider this stock for your portfolio. It just rose to strong buy territory and is coming off another earnings beat, so now could definitely be the time to give it a closer look.

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