OXPS Optionsxpress Holdings, Inc. (MM)

Charles Schwab Corp. (SCHW) released its Monthly Activity Report for May 2011, recording a 23% drop in client activity compared with May 2010 and a 9% decline from April 2011. The company’s daily average trades stood at 395,900 during the reported month. The substantial fall in client activity could be strongly indicative of investors’ lack of confidence in the stock market.

Schwab also reported opening of 61,000 brokerage accounts in May 2011, up 3% from May 2010 but down 27% from April 2011. This marked the slowest trading month since October 2010 when only 60,000 new brokerage accounts were opened.

However, on a positive note, Schwab registered an increase in new assets, with a net inflow of $9.4 billion in May. This compared favorably with a net outflow of $24.8 billion in May 2010 and a net outflow of 0.5 billion in April 2011. The company’s client assets totaled $1.67 trillion at the end of May, reflecting a growth of 18% from the prior-year month but a drop of 1% from the prior month.

At the end of May, Schwab’s clients’ active brokerage accounts totaled 8.127 million, up 3% year over year but flat with the prior month. Similarly, clients’ banking accounts climbed 18% year over year and 1% sequentially to 736,000. However, the number of corporate retirement plan participants declined 2% from May 2010 but remained flat with April 2011 at 1,436 million.

Schwab’s monthly activity report for May 2011 indicates that investors are shying away from the equity market as a result of geopolitical tensions, a weak U.S. economy and the tsunami in Japan. Although investors pumped in $1.46 billion in money market funds, they withdrew about $1 billion ($652.9 million from large capitalization stock and $303.3 million from small/mid capitalization stock) from the U.S. equity funds.

We believe that raising money market funds will likely hurt Schwab financially. These funds are less profitable than stock market funds; and a significantly low interest rate environment would further force the company to waive fees. However, after the completion of the acquisition of optionsXpress Holdings Inc. (OXPS) in the third quarter of 2011, the company’s top line will expectedly benefit from increased trading in derivatives. Also, capital spending initiatives will augment further revenue growth.

Schwab currently retains a Zacks # 3 Rank, which translates into a short-term “Hold” rating. Also, considering the fundamentals, we maintain a long-term “Neutral” recommendation on the stock.

 
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