Financial stocks tend to do well as interest rates rise. What you’re looking for in this environment is a bank stock that is likely to show an increasing net interest margin.
Like Capital One Financial (COF). In the third quarter net interest margin rose to 6.73%, up 17 basis points from the second quarter. (100 basis points equal one percentage point.) And I think net interest margins will continue to climb in 2016 as the Fed Reserve starts to raise interest rates. Credit card lending accounts for about 40% of the company’s $213 billion loan portfolio (as of the end of September 2015). Credit card loans were up in the third quarter by 12% year over year. Credit card losses were up in October to 3.38%, a 26 basis point increase from September and the bank expects charge offs to climb through early 2016 before falling.
The company has made a number of acquisitions, which to me strengthen the company’s core rather than overwhelming the bank. In 2012 it acquired the ING Direct U.S. online banking business to become the sixth largest depositary institution in the country and one of the biggest online direct banks in the U.S. Recently the bank bought General Electric’s (GE) health care finance business and its $8.5 billion healthcare lending portfolio. That deal pushes Capital One into sector under represented in the bank’s asset portfolio. About 24% of the bank’s asset portfolio is made up of commercial loans but half of that is in real estate lending.
The stock is trading near the middle of its 52-week range (of $67.73 to $92.10) after a disappointing second quarter. A recovery that began with better than expected third quarter earnings of $1.98 a share, above the $1.95 consensus estimate from Wall Street analysts, has taken the stock back to a $79 close on December 9. The stock pays a dividend of 1.9% and sports a forward price –to-earnings ratio of 10.8%.
I will be adding Capital One Financial to my Jubak’s Picks portfolio tomorrow December 10. My target price is $88 a share by October 2016.