To say that the stock market has been volatile would be a massive understatement, and very few stocks have been immune. Even some of the stocks in Warren Buffet-led Berkshire Hathaway's (BRK.A -0.36%) (BRK.B 0.11%) closely watched stock portfolio are trading for less than half of their pre-crisis prices.

While the COVID-19 pandemic is far from over and things could certainly get worse in the stock market before they get better, here's why Synchrony Financial (SYF -1.02%) could be worth a look for patient and risk-tolerant investors.

Woman sorting through credit cards.

Image source: Getty Images.

The biggest credit card company you've never heard of

I've called Synchrony Financial the "largest credit card company most people have never heard of" because it's not nearly as much of a household name as Discover (NYSE: DFS) or American Express (NYSE: AXP), yet it has a massive $82.5 billion loan portfolio -- mostly in the form of store credit card debt. Synchrony issues store credit cards for Amazon (NASDAQ: AMZN), Lowe's (NYSE: LOW), and many other top retailers.

Why has Synchrony been beaten down?

Synchrony is down by nearly 60% in 2020, and it's easy to understand why. Credit card debt is far more recession-prone than most other types, and this is especially true for store credit cards. In fact, Synchrony's net charge-off ratio in 2019 was about 6%, meaning that $600 out of every $10,000 it was owed didn't get paid back. This is compared to the credit card industry average of about 4%. And this was during a good economy. When tough times hit, store credit card defaults can easily hit double digits, which Synchrony's did during the financial crisis.

How is Synchrony doing now?

Synchrony just released its first-quarter earnings, so we're getting a glimpse of how COVID-19 is affecting the company. The good news is that core loan receivables are up 4% year-over-year and charge-offs in the first quarter were actually 70 basis points lower than they were a year ago. And deposits (Synchrony operates a high-yield savings platform) were up $0.5 billion over the past year.

However, there are some concrete signs of deterioration in Synchrony's business. Purchase volume in the last two weeks of March dropped 26% year-over-year. And like most other banks, Synchrony increased its provision for credit losses by 95% as compared to a year ago in anticipation of increased losses.

In addition, while we don't know how deep the recession will be or how many of Synchrony's customers will have trouble paying their bills, it's important to point out that this is not the financial crisis all over again. The government financial response is a big difference. We've seen stimulus payments, enhanced unemployment benefits and eligibility, and forgivable loan programs for small business owners and the self-employed. Plus, we're starting to see light at the end of the tunnel when it comes to the outbreak, and early indicators are showing that the peak happened sooner than expected and the death rate will be significantly lower than models were expecting. The point is that people might not end up having as much trouble staying current on their debt obligations as the market seems to think.

Reasons to love Synchrony long-term

With all of that in mind, there could certainly be some short-term headwinds for Synchrony's business. However, there are still some excellent reasons to love Synchrony as a long-term investment, many of which are likely what attracted Warren Buffett or his stock-pickers to the company in the first place:

For one thing, Synchrony is a very profitable company. Its net interest margin of 15.15% is extremely high, as the high interest rates of store credit cards more than offsets the higher-than-average defaults. And Synchrony's deposit platform has provided the company with nearly $65 billion of low-cost capital. For comparison, Discover's net interest margin is about 10.3%, and even that is on the higher end for the industry. 

Synchrony has done a fantastic job of creating new credit card relationships with retailers and expanding its business. In fact, purchase volume on Synchrony's cards was up by more than 10% in the first quarter, excluding the last two weeks of March.

Not for the faint of heart

To be perfectly clear, I'm not trying to call a bottom in Synchrony. In fact, if the economic fallout from the COVID-19 pandemic is worse than expected, and default rates soar, Synchrony will probably fall further. Synchrony is a very well-run business with massive margins, but investors should expect quite a roller coaster ride until we start to get some clarity on the depth and length of the recession and when the economy can start getting back to normal.