Capital One Financial Corp. (NYSE: COF) was the second of the current three Blue Chip Gems portfolio holdings from the financial sector. I’ve added it as I believe it is a good part of the market to increase allocation slightly to at the moment. A strengthening job market should continue to improve credit quality meaning write offs across the industry should continue to trend down as they have been doing for many years since the financial crisis ended. In addition, interest rates should start to head up at least a little higher in 2015 as the Federal Reserve has ended its quantitative easing programs and we should see our first rate hike from the institution since 2006 sometime this year. This would be good for banks’ net interest margins and for returns on insurers’ investment portfolios.
Auto sales and related financing remains strong and the housing market heads into the spring selling season and we should see increased activity in this space this year. Most importantly the financial sector sports reasonable valuations in a market that is feeling more and more “overboughtâ€. While the overall market is trading at approximately 18.5 times trailing earnings, many strong financial companies have stocks that are trading at 10 to 12 times earnings.
There are reasons for this discount. New regulations and increased regulatory focus and fines have increased compliance costs and led to reluctance to lend at levels we would ordinarily see at this point in a recovery or business cycle. In addition, this has been by far the weakest post war recovery of the ten cycles since 1945 as far as GDP growth.
However, it does appear the economy is slowing strengthening and regulatory action should have hit a peak and start to ebb some bolstering sentiment on the sector. We want to benefit from these trends at Blue Chip Gems and are adding Capital One (NYSE: COF) to our wallet or portfolio. Citi recently called Capital One its top pick among the credit card firms citing the company’s “strong card loan growth, capital return, and reasonable valuationâ€. It is an outlook I concur with at the moment. Let’s take a look at the investment case for Capital One and why it belongs in the Blue Chip Gems portfolio right at $80.00 a share.
