Is Capital One Really a Terrible Stock?

Sometimes unloved stocks are good stocks that have just rubbed investors the wrong way and actually represent great investment opportunities. Quite often, though, unloved stocks are unloved because there is something very wrong with either the stock or the company behind the stock.

In The Motley Fool's CAPS community stocks are rated on a scale of one to five stars based on the ratio of outperform and underperform ratings given to them by CAPS members. Stocks with the worst ratios end up with a one-star rating -- which is the CAPS' equivalent of a flashing red warning beacon.

One of the stocks that has landed that dreaded one-star rating is Capital One Financial (NYSE: COF  ) . With a focus on credit card lending, Capital One has been caught dead in the middle of the credit crisis's crosshairs. In 2008, the company nearly doubled its provision for loan losses versus the prior year, and many investors and analysts believe that more pain is ahead for credit card loans.

To get a better idea of why Capital One is so unloved, let's take a look at how it stacks up against other comparable companies.

Company

TTM Net Profit Margin

TTM Return on Assets

Price-to-Book Ratio

CAPS Rating
(out of 5)

Capital One Financial

(9.3%)

(0.4%)

0.4

*

American Express (NYSE: AXP  )

10.4%

1.8%

2.4

***

Bank of America (NYSE: BAC  )

12.3%

0.3%

0.5

***

Wells Fargo (NYSE: WFC  )

10.9%

0.4%

1.6

***

JPMorgan Chase (NYSE: JPM  )

10.6%

0.2%

1.0

**

Source: CAPS and Capital IQ, a division of Standard & Poor's. TTM = trailing 12 months.

Capital One hasn't landed at the bottom floor of CAPS for no reason; even the much-maligned Bank of America has put up better numbers over the past year. But to get more specific, let's take a look at why CAPS All-Star martynanasi has been bearish on the stock since the beginning of 2008:

Very large credit card and lender of various sorts. Tend to lend to the sub-prime consumer which is not a good thing in this market. Too many issues with current standards right now to think this stock will outperform the market even though has a P/E less than 7. I am guessing market thinks earnings growth is pretty dull going forward.

Now I'm going to toss the ball in your court. Is Capital One a stock worthy of a rock-bottom rating? Or has the CAPS community overlooked the company's potential? Head over to CAPS and let the 135,000 community members know how you feel.

And if it feels good to jab your thumb down on a stock, you may want to check out Citigroup (NYSE: C  ) and General Motors (OTC: GMGMQ.PK), both of which have been out of favor among Capital One bears.

Further Foolishness:

American Express is a Motley Fool Inside Value recommendation. The Fool owns shares of American Express. Try any of our Foolish newsletters today, free for 30 days

Fool contributor Matt Koppenheffer owns shares of American Express and Bank of America, but does not own shares of any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool. The Fool's disclosure policy has seen Snuffleupagus.


Read/Post Comments (2) | Recommend This Article (8)

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  • Report this Comment On June 11, 2009, at 10:33 AM, ChannelDunlap wrote:

    Yes, 1 star and well deserving. I almost didn't even bother reading the article, but it was short. The points you left out is that they're alienating even their good-credit customers right now. I know 3 people in my family who had (past-tense) capital one till they jacked the rates up to near 20% for no reason. now I hear they're spamming people with no way to stop it. I would normally be all over a stock at .4 P/B, but not this one.

  • Report this Comment On June 11, 2009, at 12:31 PM, kartha1 wrote:

    It is interesting to note that subscribers of TMF products received credit card offers from Captial One flooding the mailbox.

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