Yahoo Finance Buffett Buys Stake in Capital One (COF): Should You Too?
The revelation that Warren Buffett added Capital One COF to his portfolio during the first quarter resulted in the company’s share price rallying almost 10% last week. Per the data available in the latest 13-F, Buffett’s Berkshire Hathaway purchased nearly 9.92 million COF shares for more than $900 million.
It is not surprising that Buffett invested in a consumer loan provider amid the ongoing regional banking crisis and heightened recession risk. He seems to be following one of his famous quotes “Be fearful when others are greedy and be greedy when others are fearful.”
Though Buffett purchased a stake in Capital One, he fully exited his stakes in a couple of banks and added more of his favorite bank – Bank of America BAC. Buffett has had BAC stock in his portfolio since 2017.
So far this year, shares of Capital One have gained 5.3% compared with a 5.6% rally for the industry it belongs to.
Image Source: Zacks Investment Research
Let’s now try to understand what seems to have attracted Buffett to COF.
A Deep Value Pick
Value investment style — choosing stocks with low multiples or assets trading below their intrinsic value — is a widely known investment plan and is broadly followed by Buffett.
As for Capital One, its low multiples suggest that the stock is trading at a significant discount. A price-to-tangible book multiple of 0.94 compared with 9.98 for the broader market makes it one of the biggest steals in the finance sector. Hence, the heavily-discounted COF stock could become a deep-value investment in the long term.
Also, the stock has a Value Score of B.
Image Source: Zacks Investment Research
Solid Capital Deployment Plans
Dividend-paying stocks always attract investors as they act as a steady source of income and Capital One’s dividends and repurchase activities might have also encouraged Buffett’s position in the company. The bank has a dividend yield of 2.5%.
The company has a share repurchase plan in place. In April 2022, COF announced an additional $5 billion worth of buyback program (effective from the third quarter of 2022), while in January 2022, it authorized a repurchase program of up to $5 billion. As of Mar 31, 2023, nearly $5 billion worth of repurchase authorization remained.
Fundamentally Sound
While the looming recession and macroeconomic uncertainty have led to bearish investor sentiments, Capital One seems well-poised to face any downturn.
Let’s start with checking out the company’s liquidity position. As of Mar 31, 2023, almost 78% of Capital One’s deposits were insured. Being a consumer bank, there shouldn’t be much trouble brewing for the company related to huge deposit outflows. In fact, the company’s total deposits grew during the first quarter. Nonetheless, rising deposit costs will weigh on its financials in the near term.
The next is Capital One’s asset quality. During the first quarter, domestic card net charge-offs (NCOs) increased to 4.04% from 2.12% in the prior-year quarter. Management noted that monthly NCOs will reach the pre-pandemic level by June this year. Further, the company built a reserve for loan losses by approximately $1.1 billion in the quarter. While the asset quality is expected to keep deteriorating this year as real income compresses and the unemployment rate moves up, COF has adequate reserves to cover losses on 7.6% of its credit card portfolio.
The company also has a robust capital position, which will likely allow it to manage through some unforeseen events. Nonetheless, its earnings would take a hit because of this.
Revenue growth remains a major positive for Capital One. Though revenues declined marginally in 2020, the same witnessed a five-year (2017-2022) CAGR of 4.7%. Prospects look encouraging on the back of the company’s solid credit card and online banking businesses, as well as decent loan demand and opportunistic acquisitions done in the past.
Conclusion
We believe the strength in credit card and online banking operations, higher rates, modest loan growth, robust balance sheet position and strategic inorganic expansion efforts will aid Capital One’s profitability. Yet, one must keep an eye on headwinds, including weakness in asset quality and elevated expenses.
While the concerns will likely dampen investor interest in the stock given the current operating backdrop, Buffett’s investment in the stock is likely to shift investors’ focus to Capital One’s long-term prospects.
Capital One is not the only consumer loan provider in Buffett’s portfolio. Ally Financial ALLY has been part of his portfolio since last year. ALLY is predominantly an auto loan provider and currently has been facing almost similar macroeconomic issues as Capital One.
At present, Capital One carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Bank of America Corporation (BAC) : Free Stock Analysis Report
Capital One Financial Corporation (COF) : Free Stock Analysis Report
Ally Financial Inc. (ALLY) : Free Stock Analysis Report