Why Charles Schwab stock fell on Thursday

Beware of faint praise from a stock analyst: it can often trigger a sell-off in the stock. That’s what happened on Thursday Charles Schwab (SCHW -2.63%) when investors broadcast news of a prominent bank initiating coverage of the brokerage with a rather “blah” recommendation. Schwab lost nearly 3% of its value during that trading session, compared unfavorably with the 0.8% gain of S&P 500 index of the day.

Wells weighs in

No less an institution than a powerful American lender Wells Fargo launched Schwab coverage. The bank’s Michael Brown set his recommendation to equal weight (read: Hold) with a price target of $70 per share.

It wasn’t immediately clear why Brown only has a neutral stance on the brokerage, but it didn’t help with the generally gloomy investor sentiment that has dipped recently. In mid-August, institutional investors Toronto-Dominion Bank sold 40.5 million Schwab shares. While that sale had more to do with strengthening the bank’s fundamentals, it wasn’t exactly an indicator of confidence in its investment in Schwab.

Schwab is also in the midst of a transition. It aims to at least partially exit banking, which has struggled in a relatively high interest rate environment. Investors don’t like uncertainty, and Schwab’s management hasn’t provided enough details about how a scaled-down banking operation will look and work.

It’s time to take advantage of these advantages

Schwab has many strengths as a company. It still has a broad client base and a familiar brand name and operates in a frothy environment that is quite healthy for brokerage. As a business, however, there are too many question marks hanging over it for many investors’ comfort, so it’s no surprise that they took a less-than-enthusiastic analyst note to heart and shorted the stock.