FIG trader_

Does Capital One Deserve Valuation Multiple of Bigger Banks?

The author was comparing apples and oranges; the the higher loan spreads and default rates are almost exclusively due to different portfolio characteristics than that of "peers" mentioned. How can the respected author fail to notice. Ultimately, higher rewards corresponding to higher risk; Nothing revealing there? If anything, the company (pre merger) could have been compared to the BAC credit card subsidary (MBNA), JPM's or C's credit card . (Credit loss and chargeoff numbers are remarkably close for credit card subs of majors) Post-merger, the banking comparisons will at some point be valid, but only to the extent they are valid for any two banks. Are C and BAC, and WFC and WB comparable? They are comparable to the extent that they are institutions leveraged (8/10 to 1), have some mix of retail/consumer, commercial, investment banking. The company "pressed the bet" on the credit card side when they could do so with good expected returns (Nineties) and backed off (i.e.went into more retail/international banking/ and auto) this decade. It seems very sensible strategy in a higher risk credit card environment in US. In fact, the auto play also was well timed (see captives GM and F under financial stress) . No numbers on ROE's but it is not hard to imagine they are/will obliterating these two under financial stress. Surely, Fairbanks is not a magician, but who best to strategize and minimize risk while maximizing ROE. its 10% to 15% average annual return will still be near top over next five years.

Does Capital One Deserve Valuation Multiple of Bigger Banks?

For many unfamiliar with the COF story, the above "sophisticated" (though curiously selective) analysis may make sense. But anyone covering the stock for the last ten to twelve years knows there is much more than meets the eye. I'm not sure where Scott Black got has info, but COF's mortgage portfolio prior to the acquisitions was minimal. True, the credit card portfolio may be less than "prime"', though it has been generating 20%-plus ROEs for many years (as is auto finance, many fewer years). The complexion of the company has changed, but the valuation (especially circa $70 where a previous strategy of mine posted on seeking alpha of going long COF/short AXP) reflects expected lower ROEs, substantially less than that expected by the banks. (The acuisition at substantial premium to book redced the ROE substantially,but will get back up to mid to high teens by 2008) The stock trades at 1.4 x book for X-sake, the lowest valuation (exclsuive of a few dips such as post Q2 earnings and again back in 2003). The rocket scientists crunching #'s there are equal to none in the business. Fairbanks has been shrinking the risky stuff (domestic card book), lengthening the maturity of the portfolios (credit cards are short, mortgage s are theoretically longer). They have been waiting for this accdent to happen for long time (Jim Grant too), but somehow the company keeps getting back on its feet, outperforming everybody in its class, who has to get acquired (or spun off KRB, , Discover, PVN, ). Long COF/short AXP will still work exceptionally well at least until the price/book-ROE equation (multi-year outlook) is equalized, assuming AXP doesn't have "accident" like last time. remember who was buying junk bonds for AXP advisers????

Tom Brown's Financial Services Picks

the link you had showed an April date on Tom Browns report a $49 target and possible $60 with breakup. Since the stock has achieved the former price without breakup, they must be doing half way decently, though clearly not as right as some of the other banks, and for the most part just being in the right sector has worked. But go back ten years C (under Weill) has still outperformed everybody over the ten year period (even BAC, WFC, BRKA, JPM), with most outperformance coming in the first five years. Any short period of time can tilt toward any one business, say mortgage (WFC) insurance (BRK), investment banking GS; But, I'm not sure Brown's conclusion (selling assets) is the right medicine, or whether its just water cooler talk. Clearly trying to time entry and exits into specific lines of business was the sine qua none of Sandy's magic, but few other major bankers can make that claim, nor can one of the smartest ex sell side banking analyst do so without providing more detail as to how what the company will do with cash, and how secure the returns will be in the next few years (not just quarters), after he sells for top dollar today.

Want a Large Cap Bargain? Look At Capital One Financial

Nice call, I also recommended to go long COF as part of pair trade (short BAC), a less risky hedged bet, but a successful one, nonetheless. Think COF can still get another 6% to 7% by earnings season, with some declines in big name financials. There really are no company-specifc issues that could warrant the clobbering. The best bet though in such situations where they shoot first and ask questions later is always long/short.