Up 30% from December's low, it would be easy to assume shares of Capital One Financial (COF 3.55%) are shaking off 2022's miserable performance. Moreover, the Federal Reserve's decision on Wednesday to scale back its pace of interest rate hikes suggests inflation is being tamed. That's a direct win for Capital One's customers as well as an indirect win for the economy as a whole. Further bolstering this bullish case for Capital One stock is its unusually low forward-looking price-to-earnings ratio of 7.6, one of the lowest among the major names of the financial sector, in fact.
And yet, I still wouldn't own this stock.
Don't misunderstand. In the long run, Capital One Financial as a company will be fine. It may even be fine in the short run. Given its particular business model, however, the company is uniquely vulnerable to what lies ahead. Indeed, significant cracks are already beginning to form.
Capital One is uniquely vulnerable
Capital One is a credit card player, serving over 100 million customers. The company has historically aimed its offerings at consumers with less-than-ideal credit scores. What's surprisingly unclear, though, is that Capital One is not only the major lender behind its cards, but it is also one of the nation's biggest full-blown banks. It's currently sitting on more than $300 billion worth of its own loans and nearly $400 billion in assets.
And it's a tricky time to balance such a credit-heavy business model.
It remains to be seen if the global economy will slip into a recession. By some measures, it's already in one. But, near-record employment levels and relatively low corporate borrowing (according to Credit Suisse) aren't attributes you'd expect to see when the economy is weak. Conversely, credit rating outfit TransUnion reports consumers' credit card balances reached a record-breaking $930 billion as of the end of last year, with serious payment delinquencies set to grow from 2.1% to a multiyear high of 2.6% at some point in 2023. That does look more like a recession. It's possible -- and even arguable -- some people will experience what looks and feels like a recession while others won't.
On balance though, this dynamic is more bad news for Capital One Financial than not. A wide swath of its customer base is made up of the people who could be hit hardest by recession-like effects and the subsequent difficulty in making their credit card payments.
There's already evidence of the headwind, in fact. Capital One booked charge-offs of $1.43 billion in the fourth quarter, up 171% from year-ago charge-offs, and 53% greater than its charge-offs of $931 billion accounted for just a quarter earlier. In a similar vein, credit card delinquencies of 30 days or more jumped sequentially from 2.97% to 3.46% of its total portfolio last quarter, while its consumer banking loans (mostly auto loans) jumped from 4.85% to 5.62%. Both figures are as high as they've been since 2019.
It may be a hint that what's feared will happen is now already underway.
Capital One is not worth the risk
Is it a death blow? No. Capital One Financial has survived worse than this.
Stocks don't perform so well under a cloud of unknowns, though, and there are plenty of them surrounding Capital One Financial now. Even most experts are seemingly baffled as to the economy's current condition and prospects. A recent poll performed by the National Association of Business Economists indicated a 53% chance the United States will slip into a recession this year, down from the previous survey's 64%. Meanwhile, Goldman Sachs says there's only a 35% chance of a national recession, with a decent chance of avoiding one altogether.
Whether it's a recession or not, there's clearly enough risk on the table to cause trouble for Capital One. Take a pass for now and move on to something a little less subject to this sort of uncertainty.
