As one of the most renowned investors in the world, Warren Buffett’s financial activity is meticulously tracked by many. However, one stock from his portfolio, Capital One Financial Corporation (COF), is sending mixed signals, potentially indicating it may not be a prime investment opportunity for now.

Recognized as a leading credit card issuer in the United States, COF is currently trading at a cheap valuation due to the recent challenges in the banking sector. Its forward Price/Book multiple of 0.81 is 22.4% lower than the industry average of 1.05.

Moreover, with the U.S. possibly still marching toward a recession, COF might feel the impact because of its substantial bulk of credit card assets.

According to a study by Transunion, one of the largest consumer credit rating agencies, has projected that a growing number of Americans are anticipated to default on their loan payments in 2023. The report predicts a rise in credit card delinquency rates from 2.1% at the end of 2022 to 2.6% this year.

Delinquencies are up for credit cards and unsecured personal loans and will continue rising this year, hitting levels not seen in over a decade, according to Transunion.

In the first quarter of 2023, COF’s efficiency ratio was reported at 55.54%. It is important to note that while an efficiency ratio of 50% or below is considered optimal, anything higher indicates a growth in a bank’s expenses relative to its revenues or a decline in its revenues compared to its expenses.

Moreover, COF is expected to report a decline in its earnings for the second quarter, due today after the closing bell. Despite an anticipated 11.1% increase in revenue from the year-ago quarter, its EPS is projected to retract by 34.7%.

A closer analysis of some key financial metrics best illustrates the potential challenges faced by COF.

Analyzing Capital One’s Financial Performance: Fluctuations and Trends

The trailing-12-month net income of COF has shown sizable fluctuations over the reported period, with identifiable trends noted from September 2020 to March 2023.

• In September 2020, the reported net income was $1.32 billion.
• The company saw substantial growth towards the end of 2020, with its net income rising to $2.71 billion by December 2020.
• Significant growth continued through the first half of 2021. By June 2021, the net income reached a high point of $11.83 billion.
• Although there was a slight increment to $12.53 billion in September 2021, the net income declined afterward.
• The declining trend persisted through 2022, with net income dipping to $7.36 billion in December 2022.
• A persistent drop is also observed into the start of 2023, with the net income lowering further to $5.91 billion by March.

While the dataset exhibits a broad upward trend in the first half, the latter half signals a downturn which could prompt further analysis.

The trend of trailing-12-month revenue of COF over several quarters from September 2020 through to March 2023 is given below.

• From September 30, 2020, when the revenue was $16.80 billion, revenue steadily rose, reaching $18.26 billion by December 31, 2020.
• In the first quarter of 2021, i.e., by March 31, 2021, the revenue increased significantly to $24.37 billion. This positive leap continued into the second quarter, culminating at $30.59 billion by June 30, 2021.
• The upward trend continued peaking at $32.38 billion in December 2021, marking impressive growth since the start of the series date. However, in the first quarter of 2022, the trajectory took a slight dip to $31.94 billion and has been somewhat declining since then.
• By June 30, 2022, the revenue further decreased to $30.55 billion, and it further dipped to $29.52 billion by the end of the third quarter in 2022.
• The downward trend persisted until the end of 2022, when it recorded $28.40 billion, showing a consistent reduction in revenue.
• As of the last value on March 31, 2023, the revenue stood at $27.02 billion, indicating a lower financier activity than in previous years.

Overall, there was a marked growth of approximately 60% from the first recorded value on September 30, 2020 ($16.80 billion) to the highest peak on December 31, 2021 ($32.38 billion). However, this was followed by a persistent downward fluctuation of around 16% to its latest value on March 31, 2023 ($27.02 billion). The factors leading to the significant increase and subsequent decline would require a more detailed analysis.

COF’s Price/Earnings Ratio (P/E) has shown a noticeable downtrend since the end of September 2020. Here is a summary of the pattern:

• On September 30, 2020, the P/E was relatively high, recorded as 37.18.
• There was a significant drop by the end of that year, with P/E falling to 23.06 on December 31, 2020, indicating a substantial decrease in valuation multiples.
• This decreasing trend continued throughout 2021. By the end of March, it plummeted to 10.16 and then dropped to 5.43 by September 30, 2021.
• The P/E reached its lowest value of 4.31 in March 2022.
• From that point forward, we begin to see a slight reversal of this downturn. By June 2022, the P/E was up slightly to 4.41 and increased to 4.78 by the end of September 2022.
• At the close of 2022, the P/E ratio went up to 5.93, marking a noticeable increase relative to the values from earlier in the year.
• As of the last available data, by March 31, 2023, the P/E remained steady at 5.99.

The overall change from the first recorded value in September 2020 to the latest in March 2023 represents a significant decrease. The growth rate calculation shows that the Price/Earnings ratio has decreased by about 84% over this period. Although this data series reflects some fluctuations, the most significant factor is the decreasing trend, which has only recently begun to show signs of reversing.

The Return on Assets (ROA) of COF shows a generally increasing trend from the third quarter of 2020 to the last quarter of 2021, followed by a consistent decrease into 2023. Here, the key fluctuations have been summarised below:

• During the third quarter of 2020, COF posted a relatively low ROA result of 0.002.
• After that, the corporation’s ROA steadily increased, peaking at 0.029 in the third quarter of 2021.
• The trend, however, reversed after that. The ROA fell just slightly in the fourth quarter of 2021 to 0.028.
• The downward movement persisted into 2022 and 2023, where every recorded quarter saw a decrease in ROA. By the first quarter of 2023, it had dropped to 0.012.

In terms of growth rate, measured from the first to the last value in the series, there was an increase of approximately 500%. It’s important to note that while this sounds significant, ROA started from a very low base. The recent downward trend combined with the lower last reported ROA should be a consideration in future forecasts or analyses of COF’s profitability.

Six-Month Fluctuations and Volatile Growth: An Analysis of Capital One’s Share Prices

Analyzing the data for the share prices of COF from January 27, 2023, to July 19, 2023, a somewhat zigzag pattern can be observed, reflecting both growth and contraction within this period.

• On January 27, 2023, the share price was approximately $112.18.
• The share price saw an upward trend to reach $118.48 by February 3, 2023, marking an approximate 5.61% increase. However, this was followed by a slight dip to about $117.37 by February 10, 2023.
• A marked downward trajectory followed between February 17, 2023 ($114.04), and March 24, 2023 ($91.65), which accounts for around a 19.64% decrease.
• This was succeeded by a slow but steady escalation to about $97.27 on April 21, 2023, and a momentary dip to $95.55 by April 28, 2023.
• The prices plummeted to $87.67 around May 12, 2023, only to rebound by an impressive 14.98% to about $100.77 on May 26, 2023.
• The share price demonstrated a sharp increase peaking at approximately $111.91 on June 16, 2023, but again fell to $107.79 by June 23, 2023.
• The end of this period saw the share prices stabilizing slightly and showing a modest increase to about $117.96 by July 19, 2023.

In terms of the overall trend, despite various fluctuations over six months, the share price shows an increase of roughly 3.1%. This reflects a somewhat volatile growth rate during this period. It shows no clear accelerating or decelerating trend due to notable variations. Here is a chart of COF’s price over the past 180 days.

Analyzing Capital One’s POWR Ratings

COF has an overall C rating, translating to a Neutral in our POWR Ratings system. It is ranked #31 out of the 47 stocks in the Consumer Financial Services category. It has a C grade in Momentum, Quality and Stability.

Over the months from January to July 2023, COF’s rank within its category has oscillated between 27 and 33. Despite the sustained C POWR grade, it does not appear that COF has significantly improved or worsened its standing within the Consumer Financial Services category of stocks based on the given data.

Stocks to Consider Instead of Capital One Financial Corporation (COF)

Other stocks in the Consumer Financial Services sector that may be worth considering are Regional Management Corp. (RM), EZCORP Inc. (EZPW), and OneMain Holdings Inc. (OMF) — they have better POWR Ratings.

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COF shares were trading at $115.31 per share on Thursday afternoon, down $2.65 (-2.25%). Year-to-date, COF has gained 25.52%, versus a 19.49% rise in the benchmark S&P 500 index during the same period.

About the Author: Subhasree Kar

Subhasree’s keen interest in financial instruments led her to pursue a career as an investment analyst. After earning a Master’s degree in Economics, she gained knowledge of equity research and portfolio management at Finlatics. More...

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