Chris Castaldo, Stock Traders Press
Stock Traders Press makes about 12 fundamental stock selections each year. Reports are published each Tuesday/ Thursday at 4PM EST. Other reports are published based on market or company specific news. All securities are updated regularly until each position is closed. 84% of Stock Traders Press picks in the past 5 years have been profitable.
Capital One Financial Corp. (NYSE: COF)
Capital One Financial Corp. (NYSE) COF: $50.30
Company Data
| 52-week range | $37.41 - $83.84 |
| Market Cap | $18.75B |
| Shares Outstanding | 372.70M |
| Average Vol. | 8,057,070 |
| Book Value | $64.00 |
| Price/Book | 0.77 |
| Target Price | $38-$40 |
| Target Percentage | 22%-20% |
Capital One Financial is a major credit card issuer, primarily to sub-prime borrowers. Additionally, the company is a significant sub-prime mortgage lender. We are re-recommending the short sale of Capital One at current prices. We had previously recommended the short sale of Capital One at $50.12 per share on November 11, 2007 and suggested covering (repurchasing) the short sale on January 22, 2008 at $37.66 per share for a gain of 24.9%.
The reasons for once again recommending a short sale of Capital One is as follows:
The stock price of Capital One has risen sharply from $37 per share primarily as a result of the reduction in Federal Funds rate by The Federal Reserve.
While we recognize that a Federal Funds rate cut can be beneficial to Capital One, it does not address the issue of bad credit card debt as well as slower loan growth.
The company’s credit card delinquencies of 30 days or more continue to increase. As of December 2007, delinquencies were $5.9 billion up from $5.5 billion last November. In view of these credit concerns, Capital One has increased its expected credit cards and mortgage loans write-offs of 2008 to $5.9 billion up from a previously anticipated write-off of $4.9 billion.
As all credit companies, including Capital One, become much more conservative in their lending practices, the potential for strong earnings growth over the next twelve months becomes greatly diminished, if not, problematical.
Currently, the book value of Capital One is $64 per share which could be reduced to around $50 per share after charge-offs..
We believe that the current price of $50 per share does not reflect the credit risks associated with Capital One’s loan portfolio. We estimate that the stock of Capital One will decline to the $39 - $40 per share level.