It's been a tough year for finance stocks like Capital One Financial(NYSE: COF). Multi-decade high interest rates weigh on banks that have struggled to hold onto deposits, and lenders saw an uptick in delinquencies on their profiles. As a result, investors are showing an aversion to finance stocks.
Since peaking at nearly $178 per share in 2021, Capital One's stock price is down 45%. The sell-off presents an intriguing opportunity for value-focused investors. Here are four things you need to know If you're buying Capital One today.
1. Capital One is one of the largest credit card issuers in the U.S.
Capital One Financial provides services, including deposits, loans, insurance, and payment cards to individuals and businesses. With over $469 billion in total assets, Capital One Bank, a subsidiary, is the ninth-largest bank in the U.S.
Its bread-and-butter business is providing customers with Visa and Mastercard-branded credit cards. Credit card issuers manage customer accounts and rewards programs to entice customers to use their cards. Capital One has proven itself as one of the top companies in the industry. According to The Nilson Report, it was the fourth-largest credit card issuer in the U.S., with $535 billion in purchase volume. Only JPMorgan Chase, American Express, and Citigroup processed more volume.
Image source: Getty Images.
2. Berkshire Hathaway has been scooping up Capital One shares
Finance stocks have taken a hit this year. Following the failure of SVB Financial and Signature Bank in March, investors are wary of finance stocks in general. While some scrutiny is warranted, the short-term crisis resulted in steep sell-offs of some companies, including Capital One, which now trades below book value.
Berkshire Hathaway(NYSE: BRK.A)(NYSE: BRK.B), led by CEO Warren Buffett, has been adding shares of the discounted consumer finance stock throughout the year. According to its 13-F filing, the company added 9.9 million shares in the first quarter and another 2.5 million in the second.
3. Capital One lends heavily to subprime borrowers
Subprime borrowers are those with a less-than-prime credit score, generally below 670. Borrowers below this credit score tend to pose a more considerable risk for lenders because they have little to no credit or are rebuilding their credit. Experian, the consumer credit reporting company, says about 30% of U.S. consumers have a subprime credit score.
In comparison, 48% of Capital One's auto and 31% of its credit card loans are to subprime borrowers. This customer base could be heavily impacted during an economic downturn.
Not only that, but trends suggest these borrowers are feeling the pinch. Capital One charged off 4.41% of its total credit card loans in the second quarter, compared to 2.34% last year. Its charge-off rate on automotive loans more than doubled from 0.67% last year to 1.43% this year.
4. It's a good stock for value-focused investors
One of Warren Buffett's most famous pieces of investment advice is to be greedy when others are fearful and fearful when others are greedy. Capital One stock is down 33% since the start of 2021 and struggled to gain footing this year. Investors are cool toward finance stocks, creating an intriguing opportunity for value-focused, long-term investors like Buffett.
COF Price to Tangible Book Value data by YCharts
Investors currently value Capital One stock at 0.94 times its tangible book value (P/TBV), well below its 10-year average of 1.19. Excluding the pandemic-induced market-wide sell-off, Capital One is near its lowest valuation since the Great Recession.
Although the stock may be vulnerable in a recession, its cheap valuation makes it an intriguing buy for value-minded investors. Its discount to book value gives it some margin of safety for investors who buy it today and are willing to hold it for the long haul.
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Citigroup is an advertising partner of The Ascent, a Motley Fool company. SVB Financial provides credit and banking services to The Motley Fool. American Express is an advertising partner of The Ascent, a Motley Fool company. JPMorgan Chase is an advertising partner of The Ascent, a Motley Fool company. Courtney Carlsen has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway, JPMorgan Chase, Mastercard, and Visa. The Motley Fool recommends the following options: long January 2025 $370 calls on Mastercard and short January 2025 $380 calls on Mastercard. The Motley Fool has a disclosure policy.
