Investing Advice: Capital One is Underrated Now
By: Steve Smith
When Capital One Financial (COF) reported earnings earlier this month, the stock initially sold off some three percent as the company missed on both the top and bottom line. Today’s investing advice will take a more careful look at the fundamentals.
A peek behind the numbers shows the credit card company is actually doing gangbuster business, and its shares are poised to charge higher.
The main issue investors seemed to have was that COF increased its loan loss reserve, or the amount of money it’s sets aside for potential defaults. But this was a pre-emptive, and fairly conservative move, that merely reflects the increase in business.
Charge-offs did, in fact, increase by 1.5% to $1.05 billion, but total loans grew at a much faster pace of 8% to $102.2 billion.
This loan growth is the key metric; Capital One operates as a bank holding company, which means it actually issues the loans and profits from collecting fees and interest payments. This is in contrast to Visa and Mastercard, which simply collect ‘swipe’ fees.
Following the holiday season credit card balances swelled to over a $1 trillion, an all-time record.
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