Raymond James Is Bullish On Charles Schwab, E*Trade

Down nearly 20 percent in the past six months, Raymond James is recommending investors buy the dip in broker Charles Schwab Corporation SCHW. Separately, the firm continues to recommend buying E*TRADE Financial Corp ETFC.

The Analyst

Raymond James' Patrick O'Shaughnessy upgraded Charles Schwab from Market Perform to Outperform with a new $54 price target.

The analyst downgraded E*Trade from Strong Buy to Outperform with an unchanged $64 price target.

Charles Schwab

Shares of Charles Schwab are far from recent highs amid macro concerns that impacted the overall financial services sector, O'Shaughnessy said in the note. But the stock has also been impacted by company concerns, including the end of its bulk transfer program. On the other hand, expectations for at least two additional Federal Reserve rate hikes along with "very healthy" growth metrics should help drive EPS growth for Charles Schwab in 2019 and 2020.

The company also announced in July a 30-percent increase to its dividend payout and the analyst said investors should expect more dividend hikes in the coming years. A $1 billion share repurchase authorization announced last week implies an inflection point in capital return is underway.

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Separately, Deutsche Bank's Brian Bedell upgraded Charles Schwab from Hold to Buy with a price target lifted from $52 to $54.

The analyst similarly said the company's $1 billion share repurchase announcement marks a "shareholder-friendly milestone." The stock is trading near a 10-year trough at an 8 percent P/E premium to the S&P 500 on NTM consensus estimates versus a more than 40 percent average premium over the past three years and more than 50 percent over the past 10 years.

E*Trade

A bullish stance on E*Trade remains in place despite a downgrade. O'Shaughnessy said the downgrade better reflects the reduced likelihood of the company selling itself from a "reasonable probability" as of March to a "lower probability."

Nevertheless, E*Trade's longer-term 2023 EPS guidance of more than $7.00 per share implies the company is committed to growing its earnings at a compounded annual growth rate of more than 12 percent, the analyst wrote. Coupled with the stock's current attractive valuation of 11.5 times NTM P/E investors should continue being buyers of the stock after recent weakness in E*Trade and overall online broker sector.

Price Action

Shares of Charles Schwab were trading higher by more than 2 percent Tuesday, while E*Trade's stock was down about 1 percent.