If there were only one chart that I could use to illustrate Capital One's (COF 2.35%) success since it set off an independent course two decades ago, this would be it:
This shows that Capital One's book value per share has grown faster (by a very large margin!) than the nation's four biggest banks since 1995: JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo.
This matters because a bank's book value per share is one of two main variables that dictate a bank's stock price -- the other being return on equity, which influences the multiple at which a bank's stock trades relative to its book value.
Generally speaking, a bank's shares will trade for between 0.5 and 2.5 times book value depending on where we're at in the business, interest rate, and credit cycles. Bank stocks trade at the higher end of this range when the economy is expanding rapidly, with the best-performing banks often even exceeding it. When the economy takes a turn for the worse, however, elevated loan default rates weigh on bank profits and thereby on the valuation of their shares.
Holding all else equal, then, a bank with a higher book value per share will have a higher share price. For the same reason, the faster a particular bank's book value per share increases, the faster its share price will follow suit.
It's worth noting, moreover, that an investor can get a better idea about a bank's fundamental performance by looking at changes in its book value than one can glean from changes in the bank's share price. This is because the latter reflects investor sentiment, over which banks don't have direct control.
It's for this reason that Warren Buffett, the world's foremost investor, has long tracked Berkshire Hathaway's performance not by analyzing the growth in its share price but rather by looking at changes to its book value. "We've done that because book value has been a crude, but useful, tracking device for the number that really counts: intrinsic business value," the 84-year-old billionaire wrote in his latest letter to Berkshire shareholders.
Needless to say, all of this goes a long way toward explaining why Capital One's shares have outperformed this same group of banks over the last 20 years. Since 1995, its shares have returned approximately 1,600% after factoring in the impact of dividends and share buybacks. That exceeds runner-up Wells Fargo by 250 percentage points and is roughly twice JPMorgan's total return.