Since Warren Buffett took over as CEO of Berkshire Hathaway in 1965 through the end of last year, the stock has delivered a total return of 3,787,464% -- that's an annual compound growth rate of about 20%. By comparison, the S&P 500 index has returned an average of 9.9% annually.
Buffett is easily one of the best investors of all time, which is why many investors eagerly await the publication of Berkshire Hathaway's quarterly 13-F filing. This form discloses institutional investors' quarterly trading activity and provides insights into how big investors manage their portfolios.
Berkshire Hathaway bought shares in five companies in the second quarter, one of which was Capital One Financial (COF 0.16%). Berkshire opened its position in the retail bank in the first quarter with a purchase of around 9.9 million shares and added another 2.5 million shares in the second, bringing its total stake to $1.36 billion.
Here's what you need to know about Capital One to decide if it's a good fit for your portfolio.
It is one of the largest credit card issuers
Capital One provides financial services for consumers and businesses, including deposits, loans, and insurance. It operates Capital One Bank and has $469 billion in total assets, making it the ninth-largest bank in the U.S.
Its bread-and-butter business is providing customers with Visa or Mastercard branded credit cards. In 2022, its credit cards had $535 billion in purchase volume, making it the fourth-largest credit card issuer in the U.S., behind JPMorgan Chase, American Express, and Citigroup.
An opportunity amid the banking sell-off
Financial stocks struggled early this year due to the collapses of SVB Financial's Silicon Valley Bank and Signature Bank in March. Those two banks suffered from surges in deposit outflows that threatened their businesses and could've forced them to take painful losses on their bond portfolios.
At the time of that regional bank crisis, investors broadly soured on all financial stocks, leading to widespread selling. That sell-first-ask-questions-later behavior resulted in revaluations lower for many financial companies, including Capital One. At one point this year, Capital One traded at 0.94 times sales and 0.82 times its tangible book value -- well below its 10-year averages of 1.7 times sales and 1.2 times book value.
COF PS Ratio data by YCharts.
Capital One's cheap valuation could be one reason why Buffett and his team at Berkshire scooped up its shares in two consecutive quarters. But Capital One doesn't face the same pressures as the regional banks that failed.
One thing that led to the rapid deposit outflows from Silicon Valley Bank was that only 15% of its deposits were FDIC-insured. In comparison, 78% of Capital One's deposits are insured. Moreover, since the bank sector issues began, Capital One's deposits have continued to grow. At the end of the second quarter, its total deposits were $313 billion, up 17% year over year.
What Capital One investors must consider
Capital One's customer base includes a fair amount of subprime borrowers -- people with credit scores that are generally below 670. People in this cohort tend to be more risky for lenders because it includes those with little or no credit, as well as those rebuilding their credit. According to Experian, 30% of U.S. consumers have subprime credit scores.
At the end of the second quarter, 48% of Capital One's auto and 31% of its credit card loans were to consumers with subprime credit. These consumers generally could be more vulnerable to trouble in an economic downturn that might leave them unable to repay their loans.
There have been signals that consumers are beginning to feel the pinch from the combination of higher interest rates and inflationary pressures. Capital One charged off 4.4% of its total credit card loans in the second quarter, up from 2.3% in the second quarter of last year. The company has raised its allowance for credit losses on credit loans to $10.9 billion, or about 7.7% of its total loan portfolio, providing a cushion if charge-offs continue climbing.
Investor takeaway
Capital One has been a growing position for Berkshire Hathaway this year. The bank could face some headwinds from the economy. However, the stock trades at a slight discount to book value, potentially giving it some margin of safety if the economy experience a downturn.
While it may face short-term volatility, especially if we get a recession, Capital One could be an appealing stock to open a small position in today and add to if it dips even further below book value.
