I initiated a new position last week in Capital One Financial Corp (COF) at $86.01. It is our 11th largest position at this time.
Reason for current opportunity
The share price for Capital One alone with most financials seem to be under pressure with the broad market selloff which started partially due to increasing fed interest rates, which is odd when most banks due better with higher interest rates. However, with a credit card centric business such as Capital One, it doesn’t matter too much since the rates they charge are not directly related to the fed rate like some of our other banking holdings like Community Community Bancorp Vermont (CMTV) and Community Bank System, Inc. (CBU).
However, that being said, there are some threats to their business, which are:
- Increased competition in auto lending, which is a part of the revenue.
- Threats from technology disruption (ie. Cryptocurrencies, digital wallets, Paypal (PYPL), Google (GOOG) /Apple (AAPL) /Amazon (AMZN) credit/payment options, other online banking businesses)
- The need to increase rewards to obtain/retain customers using their credit cards
Why Capital One?
Capital One has been on my watch list for a while since I replaced my Paypal debit card with a Capital One credit card. While the Capital One credit card charges an annual fee, which the Paypal card did not, the Capital One card pays 2% back on ALL purchases, and the reward payments are made monthly in cash. I get a lot more back even with the annual fee. I find their online system better than Paypal’s in that it the reports/exports are easier to understand and work with and customer service has been better in my opinion.
Some strengths I see in the business are:
- They are diversified into consumer and commercial lending which should help them to cross promote credit cards.
- They have been able to acquire assets at competitive pricing increasing book value.
- They’re good at what they do and they have a large share of the markets they serve.
- Millennials are increasingly looking to use credit card debt for purchased which bodes well for future growth.
- The trend is towards cash-less transactions and online/mobile buying which favors credit cards.
I feel at the current stock price, it’s become an increasingly good value.
Capital One currently trades at a:
- 7.7 forward PE
- Price/Book of .8
- PEG of .3
- PEG payback in years is 3.8
- dividend yield is 1.8%
These numbers are significantly better than the industry average in every way.
I believe the current stock price drop represents a great opportunity for those not currently invested or with a small position in COF. If the price should continue to drop, I will most likely add to this initial position.