Capital One: Debt's In Your Wallet?

By Gregory S. Davis | October 07, 2008 AAA

Capital One (NYSE:COF) wants to know "What's in your wallet?". The answer for an increasingly large number of American's is a massive load of credit card debt. While the $700 billion bailout package is being tailored to rescue the U.S. financial system, investors should also consider the implications of the $943 billion in credit card debt U.S. credit card holders have accumulated as of May 2008 according the Federal Reserve. The size of the credit card debt market makes the idea of investing in credit card companies tempting, but investors should not rush in.

Rising Delinquencies
The credit crunch is limiting the availability of credit and in some cases causing credit card companies to reduce credit availability on existing accounts in order to limit their exposure to delinquencies. At the end of the second quarter of 2008 Capital One's U.S. card segment reported a rise in charge-offs and delinquencies from the same period a year ago. Expectations for higher charge-offs in the third and fourth quarters suggest that consumers are expected to have continued difficultly meeting their credit card obligations as basics like covering the mortgage and buying gasoline take precedence. (If credit card debt is cutting into your finances, see Six Major Credit Card Mistakes and Expert Tips For Cutting Credit Card Debt.)

Approaching Holiday Season
The tinsel, candy canes and red Santa suits have yet to invade your local shopping mall, but with the downturn in economy means retailers like Kohl's (NYSE:KSS), J.C. Penney (NYSE:JCP) and Nordstrom (NYSE:JWN) may begin their holiday season push early this year. Earlier this month Kohl's announced the opening of 46 stores in order to muscle market share away from competitors. The unknown factor is whether the spirit of giving with retail purchases will be paid for with cash on hand or with the easy slide of shopper's hard plastic.

Valuation
Capital One has a triple combination of ratios that signal an undervalue stock including a low PEG ratio of 0.70, a relatively low price-to-sales ratio of 1.28 and a low price-to-book ratio of 0.57. The PEG ratio below 1 suggests strong earnings growth potential over the next five years. The 1.28 P/S ratio translates into investors paying $1.28 for each $1 of revenue generated. The low P/B suggests that Capital One is selling below the actual break up value of the company. Although Capital One has returned -20.68% since the beginning of the year, it has outperformed the SPDRS S&P 500 Index ETF (AMEX:SPY), American Express (NYSE:AXP) and Discover Financial (NYSE:DFS). (To learn more, see Use Price-To-Sales Ratios To Value Stocks.)

Final Thoughts
Given the volatility in the market along with the fundamentals fading away against the tide of the market, it's appropriate to mention that the Dodge and Cox Stock Fund (DODGX) is one of Capital One's largest stockholders as an option to consider. The idea is to always build a diversified portfolio of investments with a dollar cost averaging approach during these difficult economic times.

To learn more about this strategy, read DCA: It Gets You In At The Bottom.

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