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.

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.

Related Articles
  1. Chart Advisor

    Copper Continues Its Descent

    Copper prices have been under pressure lately and based on these charts it doesn't seem that it will reverse any time soon.
  2. Options & Futures

    Cyclical Versus Non-Cyclical Stocks

    Investing during an economic downturn simply means changing your focus. Discover the benefits of defensive stocks.
  3. Mutual Funds & ETFs

    Buying Vanguard Mutual Funds Vs. ETFs

    Learn about the differences between Vanguard's mutual fund and ETF products, and discover which may be more appropriate for investors.
  4. Mutual Funds & ETFs

    ETFs Vs. Mutual Funds: Choosing For Your Retirement

    Learn about the difference between using mutual funds versus ETFs for retirement, including which investment strategies and goals are best served by each.
  5. Mutual Funds & ETFs

    How to Reinvest Dividends from ETFs

    Learn about reinvesting ETF dividends, including the benefits and drawbacks of dividend reinvestment plans (DRIPs) and manual reinvestment.
  6. Investing Basics

    How to Deduct Your Stock Losses

    Held onto a stock for too long? Selling at a loss is never ideal, but it is possible to minimize the damage. Here's how.
  7. Mutual Funds & ETFs

    Best 3 Vanguard Funds that Track the Top 500 Companies

    Discover the three Vanguard funds tracking the S&P 500 Index, and learn about the characteristics and historical statistics of these funds.
  8. Forex Fundamentals

    How to Buy Chinese Yuan

    Discover the different options that are available to investors who want to obtain exposure to the Chinese yuan, including ETFs and ETNs.
  9. Mutual Funds & ETFs

    ETF Fees: Why BlackRock is the Latest to Cut Them

    Low expense ratios are a big selling point for ETFs, but are they being focused on too much?
  10. Economics

    Is Wall Street Living in Denial?

    Will remaining calm and staying long present significant risks to your investment health?
  1. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  2. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  3. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  4. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  5. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
  6. Can mutual fund expense ratios be negative?

    Mutual fund expense ratios cannot be negative. An expense ratio is the sum total of all fees charged by an asset management ... Read Full Answer >>

You May Also Like

Trading Center