A Gem in the Subprime Space

One name that stands out to me in this supbrime mess is Capital One financial. You probably know them for their credit card business, but by the end of this fiscal year that’s only going to be half of their revenue. The stock has done pretty much nothing over the past year, as concerns over the North Folk Bank integration has weighed on shares amid a rising market. Whats great about this company is that 2007 will be a turning point year, as return on equity and growth increase from prior years. The company’s transition from a credit card company with below average growth to a diverse financial services firm has come at the cost of shareholder returns, but this year that should end. Another thing that people have to realize about this company is that the charged-off rate on their credit cards is the lowest its been in the past 10 years ( at only 2.2%), and the deliquency rate has gone down every year since 2002 (3.2% now vs. 5.6% then), so clearly its unfair to punish them for New Century and Accredited Home Lenders’ problems because they don’t have much to do with COF. Finally, the transition from a subprime credit-card lender to a credit card, mortgage, auto loan and banking company has brought its P/E down to 9.7-10.3x management’s projected 2007 earnings and less than 1x book value. I think thats too cheap.

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