Forget Your Wallet - Capital One Belongs In Your Portfolio

| About: Capital One (COF)
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With the exception of Goldman Sachs (NYSE:GS) and Morgan Stanley (NYSE:MS), sentiment on the financials is improving on the back of the recently completed stress tests and the Fed's approval of various capital plans. Bank of America (NYSE:BAC) was a big winner here as it received permission to buy back $5 billion worth of stock and redeem $5.5 billion worth of preferred stock. This confirms why Warren Buffett and I have exposure (OK, he has a bit more exposure) to the stock as I recently highlighted.

Another financial institution that did well in these tests and is also reporting improving metrics is Capital One (NYSE:COF). These cheap shares look like they are going to go higher in the next few months.

Here are some recent positives for COF:

  • The company received permission to increase its quarterly dividend to 30 cents per share. This is a huge increase from the 5 cents per quarter it is currently paying.
  • It also just reported that the February U.S. charge-off rate slipped to 4.27% from 4.36 in January, and its U.S. delinquency rate was 3.68% vs. 3.72% in the prior month.
  • COF's "Buy" rating was reiterated at TheStreet last week.
  • Billionaire investor Stephen Mandel ($16 billion under management) had Capital One as his second largest portfolio addition in the fourth quarter.

Here are three additional reasons why COF provides good value at under $55 a share:

  1. It trades at 8.5x forward earnings, a decent discount to its five-year average (13.5).
  2. Its purchase of HSBC's credit card portfolio ensured it is a major player in the private label space. In addition, investor appetite for credit card securitizations has rebounded in the quest for yield.
  3. The 25 analysts who cover the shares have a median price target of $65 a share on the stock. S&P has a "Buy" rating and a $68 price target on COF. Goldman Sachs upgraded the shares to "Buy" and raised its price target to $75 from $65 prior to its poorly received fourth-quarter earnings report, which changed that sentiment. It's important to note that Goldman speculated that Capital One would raise its dividend significantly in 2014, not now as announced. The company seems to alternate between beating or missing earnings estimates every other quarter. This would mean the next report will beat estimates nicely if the trend holds.

Disclosure: I am long BAC. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.