Dare it is. CapitalOne

Graphic, cover, Capital One 215 ValueBanner, Link to the RealDECEMBER 21, 2019



diving defensive plays for bargains now is a fruitless folly. But we want a bargain. “You know what a bargain is? Buying nothing” David Faber. Well, that’s actually called saving. Is it time to save? Always, and it’s also time for value. Can you smell the building rotation? It’s back to growth yo, soon. Think 266,000 November jobs and repeat all-time highs for all three indexes. Smell it now? The savvy never argue with jobs, rotations, or real bargains. Know any? Capital One?

Over three months we’ve witnessed the financials transform from a gaggle of dopey nappers into shimmering stars. Yup. Bam. Institutional money squirts like that. Witness the big banks. Jamie’s JPM used to sell for 1.6x book–buying with both hands yo. Now it cool-glides somewhere above the clouds in a hushed grace, all a fatter 1.84x book. Up 16%–three quick months.


And others? Skank of America? Better back up. BAC; up 17.7%, three rolled months. Only the hooks of a claw hammer rakes our wallet out for BAC’s price now. Even the still grab-asstic criminal stage coach known as Wells Fargo has creaked forward 9.8%. Wells is now more expensive than enticing. We know. We’re still attempting to hatch a pile.

Once bargains roar they’re no longer bargains. A few become parables, while the rest simply become pricey. Any rotation-driven move up creates a bit of multiple expansion. That’s unless company fundamentals also improve. Most don’t. All up moves have only so much gas. All that’s where we’re at with Capital One. COF is now one of the top 10 largest lenders in the U.S., and has more than 520 bank branches, mainly in the east. Bank deposits mean better funding, and more security. It’s not just a card dealer. It’s up. It’s value, and it pays. Is that enough?  STOCKjAW looks deep to see…”Dare it is. Capital One.” 




palm tree, Christmas
A Christmas sunset over the water. Warm wishes to you for these holidays. Bringing the good stuff is why we do it. Investing, the video game where the points are real.


in April the House Financial Services and Intelligence committees unloaded on two  financials.  Twin subpoenas were unleashed like dogs to compel each to release more than a decades’ worth of Trump tax returns.  Both financials had previously refused.  This came after the 2nd U.S. Court of Appeals ruled two-to-one that this release of documents cannot be blocked by any president.  Who discovered bulky subpoenas in their shorts?  The Frankfurt-based “I’ve fallen and can’t run my business” Deutsche Bank(DB), and the suddenly soaring McLean Virginia-based card dealer Capital One Financial Corp.(COF.)


Each of these financials are themselves compelling, but for very different reasons.  Deutsche Bank is a chaotic shambles hyper-busy shrinking while cutting year-end bonuses.  You have to pay them, if you wanna drop some money off.  Capital One Financial is madly soaring along with it’s sister financials and banging away at new 52 week highs in serial fashion.  while doing all that it’s casually remaining shockingly affordable, and willing to pay you a 1.54% dividend just for coming on board.  We don’t roll out of bed for that, but Dare it is.  Is Capital One a good stock?  What’s their ticket gonna cost you?  We looked in.



There’s no contest here. COF wins walking away.

Above you see the valuation metrics for Capital One, Discover, MasterCard, American Express, and Visa. It you like cheap Capital One kills it, with Discover(DFS) coming in a very nice second.


financials caught a rotational bid beginning three months ago, and are now roaring.  JPM is a prime example.  What does Morningstar say?  “Overall, the median U.S.-based financial-services stock trades at about a 2% discount to our fair value estimate, so we consider the U.S. financial sector slightly undervalued.  Whereas over the previous year we’ve had times where whole financial industry groups were undervalued, we believe investors should now be much choosier. Most of the undervalued financial stocks in North America either have company-specific issues that we believe the market isn’t appropriately pricing, or are more economically sensitive names. While there are near-term risks to the companies we currently regard as undervalued, they also have the greatest probability of long-term outperformance.”–Morningstar  Sector Report; Financial Services, 10-14-19.

Capital One Financial Corp.(COF), Morningstar current Fair Value rating $136.00.  Price 12-21-19 $103.37.  That’s a 31.5% move.


That’s all America.  Just now financials in the grab-asstic Eurozone read like a ludicrous funk house.  The jaw-dropping tone is one of lingering fraud, big red shoes, and prolonged disruption.  Example.  Back in October Credit Suisse COO Pierre-Olivier Bouée was fired out of the stiffly-proud Swiss bank like a tear gas canister and left simmering jobless on a Zurich street.  Why?  Believing himself entitled to behave like some secret actor out of Interpol, Bouée ordered the surveillance of a former high-level Credit Suisse executive based on dubious suspicions of client and employee pouching.  Industry-wide laughter followed the pantomime.


Meanwhile Germany’s Deutsche Bank has been working feverishly to stem the ruinous outflow of assets under management, and build even a modicum of provisional reserves, all under the scornful eye of the ECB.  To the west, London has long functioned as the EU’s power center and an undeniable world financial capital.  But now London’s an election-confirmed shattering ship, as Brexit’s now firmly in Boris’ hands and thus a for sure.  Every London-based global financial now sullenly mulls the implications, and staggering economic stupidity of, slaughtering a world funding power.  The packing has already begun.


Capital One Holidays

Capital One app
COF is a busy company, and busier this holiday with four apps. Their consumer offerings are pretty good, including 0% introductory APR card offers and a new Walmart store card offering 2% cash back. The services hare aren’t bad either, particular the card on/off switch. As an equity they’re more complicated.


it’s December 9th edition Barron’s told a Capital One story.  Wow.  It’s balance sheet is a “fort,” the card business is less risky and more profitable than other forms of lending, and it has better funding now due to it’s quarter of a trillion dollars of bank deposits.  It’s becoming a bank yo.  On the morning of the 16th out came a report citing COF’s higher domestic credit card “charge offs,”(losses) rising to 4.43%, up 12.1% m/m from 3.95%.  This metric is reported monthly and that result isn’t monumental.  Simultaneously, Citigroup raised Capital One’s price target to $120, above the analysts’ average of $107.  Barron’s makes a stunning point, and contrast:



“Capital One lost money in only one year of the financial crisis; only $0.21 a share, in part due to an accounting change.  Citigroup lost a cumulative $64 a share over ’07-’08 and required a federal bailout.”



So who sucks there?  Barron’s also makes two additional striking points.  Credit card lending isn’t as risky as more traditional forms of lending, like mortgages.  For one, credit card losses can double in a downturn, but mortgages failed at a rate five times higher during the sub-prime disaster.  Secondly, credit card lending is a much higher yielding asset.  “Capital One’s total revenue yield–total revenue including fees divided by total assets, is about 8%.  JPM’s is about 4%.  Credit cards are priced to absorb higher losses.”  O.K., now we’re transfixed.  Card lending outperforms other forms of lending.


“Earnings at Capital One have grown at an average annual rate of about 8% over the past five years.  And earnings growth is expected to exceed it’s larger banking peers for the next two years.”–Barron’s Dec. 9, 2019.  When averaged perhaps so, yet the results were very mixed(see chart in conclusion.)  In ’15 and ’16 annual EPS was -8%y/y and -1%y/y.  For 2017 it was 7.5% and 2018 59%.  2019 total EPS is expected to be $11.07 vs. last year’s $11.84.  That’s a decrease of -6.5%.(data source; Schwab QORE ANALYTICS®)  CFRA records ’18 FY EPS at $11.84, ’19 at $11.90, and ’20 at $11.80.  Do you call that EPS growth?



Graphic, On the call


is the tip of the spear in building a national bank.”  That’s precisely what management said on their Q3 call.  The company sliced marketing spend by 8% over the quarter.  Capital One’s third quarter is a story of opposing movement.  What else did management say?  “Margins are actually pretty healthy.  We continue to see a growth opportunity.”  That’s good because costs increased, yet loans also increased.  The company’s loans increased overall by 2%, to $249 billion.  That includes credit cards, auto loans, consumer, and commercial banking loans.  The average amount in each category also increased.  All good.


More significant was the “pre-provisional earnings decrease of 8% to $3.1 billion.”  This metric is commonly known as PPOP, or “pre-provisional operating profit.”  PPOP includes all expenses with the exception of interest and taxes.  However, PPOP is profit before subtracting “provisions” or reserves to cover loan losses.  That cash is like poker chips snatched directly off your working stack.  They’re yours, but you can’t bet with them, by regulation.  The PPOP metric is more cost inclusive then the common EBITDA(earnings before interest, taxes, depreciation, and amortization.)



capital One, Wikibuy
Even ad avoiders have no doubt caught the CapitalOne ad concerning excessive data mining. Yeah, they have a streamlined process. They also have this. A price comparison app? Such are the very heart of intrusive data mining. They also offer Eno, a “shopping assistant,” and Paribus, yet another tracking app that follows prices post purchase to insure you the lowest price, and “makes it easy” to refund the difference. Combine all three and they’ll know every shopping move you make. And who do they share/sell the data with, and for what?

-The Core Issues-



Never have we witnessed a call handled in such a halting, cautious, deliberative, manner.  Think long pregnant pauses as analysts awaited responses.  The call featured zero laughter, warmth, or social niceties.  It seemed almost suspicious on the part of management, amidst those empty spaces preceding nearly all answers.  That’s unusual, and the opposite of say Ford, where a comment about Hackett’s grand children floated through.


CECL:  One core issue on the table for Capital One is CECL compliance. CECL is an industry-wide accounting rules reboot.  On January 1 new rules take effect changing the way all lenders are required to both account for, and provide for, loan losses.  Said rules also change accounting practices concerning all corresponding loan-related revenues.  The new mandate is again CECL, or “current expected credit losses methodology.”  The rules are more conservative, forcing lenders to “book” or report all potential lifetime loan losses prior to the booking of any revenues.


What it means.  Measuring the metrics of all lenders–big diversified banks included–from now on will be very different.  The bottom line also means that all lenders will now be forced to dramatically increase reserves to protect against the funk of loan losses.  COF understands this switch to require a reserves increase of between 30% to 40%.  That subtracts significant working capital into a regulatory dead zone.  Again, that’s poker chips removed directly from your working stack, in an amount relative to your bet in the pot.



data breach
Between the middle of March and July this year Capital One’s cloud-based system was suffering a massive and on-going cyber hack. Over 100 million records were breached many of which included everything; name, address, phone #, email, DOB, and self-reported income. Tens of thousands also included SS#s and bank account #. On Monday July 29th a former software engineer, Paige A. Thompson of Seattle, was arrested by the FBI. The breach was briefly mentioned in the call, as top management attempted to reaffirm the benefits of their move to the cloud.  Above is a record of the largest financial and insurance company breaches.  Equifax’s brute arrogant negligence still rules.  They can’t even hold on to the things they steal, say, your data.  Did you ever provide them with permission to collect and sell it?


portfolio.  COF purchased a portfolio of Walmart debt, totaling approximately $8 million.  Capital One did so while also entering into a “loss partnership” with Walmart concerning that debt acquisition.  Additionally, COF is launching a branded Walmart store card.  The card offers 2% back on purchases both online and in store.  Head count at the company increased 9.9% q/q, primarily to manage this launch.


The company is continuing it’s operational migration to the cloud.  Obviously, not all has gone well.  The company is about to enter into year seven of what they refer to as a  “technological transformation.”  The digit makeover is a “bottoms-up” approach, leaving the point-of-sale as the last thing that will be fully digitized.  Yet changes are happening there now.  Expectations are high for the “real-time” capabilities created, including instant pricing for their range of loan products.  What did management say?  “We remain all-in on our transformation.  Currently straddling the data center and cloud.”


And what did management say concerning market conditions?  “We’re still in the overall mode of cautious, concerning the economy.”  Conditions are competitive.  “The cycle[late business cycle] and conditions[economic] continue to dominate…The prime market is competitive healthy…The prime consumer is healthy…The auto lending market is intense.  We’re seeing a lot of small independent lenders entering the space, primarily the lower sub-prime area.”  In corporate reporting terms “competitive” means brutal, while “intense” means hand-to-hand combat with chopping medivac helicopters.


Capital One Financial COF: NYSE 12-18-19

Capital one chart
Last year’s Christmas Eve gift sucked Capital One’s shares to it’s current 52-week low of $69.90. Wednesday pre-market it sits at $104.34. That’s a 38% move YTD, at a bargain price. It’s technicals now sparkled like a holiday garland of goodness. Yet it’s average analyst’s price target in only $107, a mere $3 bucks above. The Citigroup price target was raised two days ago to $120. We rate all such PTs as of minimal help. Why? Routinely PTs trail the actual price-action as it rises, rather than courageously leading.

-CFRA Stock Report-

“Our Sell recommendation reflects the limited growth opportunities we see as the current credit cycle matures and auto sales growth moderates. We also think investors are under appreciating risks to deteriorating credit. Although charge-offs and delinquencies have been moderate, we think the odds of rising delinquencies and charge-offs have increased as strong macroeconomic conditions indicate a cycle closer to the peak with little room for further improvement, in our opinion. COF has the highest exposure to sub-prime borrowers…”–CFRA. 12-14-2019. Price at report $104.39.


COF’s set to report fiscal Q4 next month, 1-21-2020.  The consensus now is for EPS of $2.30 a share, Non-GAAP.  They’ll be facing the easiest y/y comparison so far this year.  Q4, 2018 GAAP EPS came in at $2.49 a share, a 17.6% y/y EPS growth rate.  Non-GAAP Q4 ’18 was $1.87, a consensus estimate miss of 21%. 


Meanwhile, revenues have been flat throughout 2019, at just over $7 billion.  No glory exists in flat revenue metrics.  Year-over-year little changes.  FY 2018 revenues totaled $27.1b.  With one quarter remaining, 2019’s total is projected at $28.5b.  That’s a respectable 5% y/y revenue growth.


football, fumble

Times are tough. Despite the demonstrated strengths, the lending environment is squeezed by both low rates and fierce competition. Capital One is executing well and has been rewarded for said. Yet a sector rotation will be like the play-offs. Only the very few will remain to compete for investor’s dollars.


In share price appreciation, Capital One is neither FICO nor Global Payments, which have roared 96.7% and 77.8%YTD respectively.  But then neither is anyone else.  Capital One is a Consumer Finance company in the process of becoming a diversified bank.  Listen to the Q3 call.  It’s working.  COF now ranks as a “well capitalized” financial with a common equity Tier 1 capital ratio of 12.5%.  That’s 5.5% above the 7% needed to be ranked in that top Tier of five.  Very impressive.


However, shares have risen over 36.7%YTD as of close Friday, 12-20-19.  They did so in two phases, the first occurring during the market-wide recovery following the brutal plunge last X-Mas.  Shares drifted sideways for six months, before phase two, a 12.9% rise beginning just prior to reporting Q3 results on October 24th.  That move reads as a primarily results driven climb, yet amid the favorable conditions of a rising financial sector tide.  That means institutional money rolled in and lifted everyone including COF.


COF faces the likelihood of prolonged low interest rates.  Low rates mean low net interest margins(NIM), which limit the profitability of all lending.  Further, the company’s flat EPS projections we’ve seen leave little reason to expect much upward share price movement near term.  In management’s own words the lending environment is “competitive” and the sub-prime auto slice is “intense,” with “a lot of new small independent” players crashing the space.  Auto sales are also weak, internationally.  When a company cites “competitive” conditions they mean close-quarters struggle, rather then good times.


New accounting rules force more of COF’s working capital into loan loss provisions.  Meanwhile the company continues to buy back their own shares by the chunk.  Their operational move to the cloud seems prolonged, and blemished by the 3rd largest cyber hack in the space.  That “technological transformation” will bring goodness in the end, yet COF is about to enter their 7th year of the process.  Is that typical?  The company freely acknowledges their atypical “bottom-up” transformation approach, leaving the point-of-sale(POS) last in line for the cloud-based make-over.  Huh?  That seems odd. 




Capital One Financial COF: NYSE 12-21-19

Capital one, chart 12-21-19
The Barron’s quote above is enticing, until you see the metrics, and this whiplash chart.  In ’15 & ’16 COG’s Y/Y comps were negative. In ’17 it was 7.5%. In ’18 it was 59% y/y EPS growth. That’s how Barron’s is able to say “…averaged annual growth rate of 8%.” If you held COF for this 5 year period, reinvesting all dividends, you would be up a total of 38%.


for better cloud-driven “real-time” pricing and customer processing, along with any possible revenue bump from their now launching Walmart rewards card, doesn’t seem wise, based on their collective headwinds.  Nor will their modest 1.54% dividend create sufficient joy for anyone waiting.  COF’ is soaring technically(see first chart.)  That’s not enough.


COF’s EPS growth remains extremely choppy.  If business confidence improves the market will rotate back to growth, leaving investor inflows to COF flat.  We feel such a rotation fairly likely.  If not, the low rate environment will persist, offering no macro help for lenders.  At that point better players, perhaps JPM, BAC, or fintech plays like PYPL, will absorb much of the incoming investor cash.  We just don’t see anything like enticing EPS growth.  In fact we’re seeing negative to flat estimates for 2020.  Taken together, we don’t see any need to own Capital One here.  




Capital One

Capital One Financial

Investor Relations

Q3, 2019 materials:

Earnings Financial Supplement, Presentation, & Press Release. October 24, 2019.  Q3 Conference Call Webcast replay click “Calendar of Events” link, top left margin. 



Jam of the Day

Give it up.


Public Enemy, Give it up



As always good luck and good investing, and a happy holidays, from STOCKjAW.



The Investing Journey

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Dollars Are Employees. We Make Them Work. Slack Dollars Reborn Busy. STOCKjAW helps You make the dollars you worked for work back. Do it simple and streamlined. Or do it Full-Bore. Stocks, ETFs, and more. It's Your cash. Sj helps you point it in the correct direction.

2 thoughts on “Dare it is. CapitalOne

  1. Lots of great information… maybe to much.
    I had to eat my oatmeal and fire up the coffee pot at half time…
    Not to dampen your Christmas spirit, but the next long article, I’m skipping to the conclusion.

    Merry Christmas and a happy new year to my friends at Stockjaw!
    With very best regards, Fitz


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