Capital One Financial Corp. (COF): More Than the Card in Your Wallet

The stigma of “big bad banks” may never go away in market news, but that doesn’t mean large financial institutions are bad investments. In one company’s celebrity heavy advertising, the punchline asks, “What’s in Your Wallet?” Capital One Financial Corp. (COF) asks that question, but I ask about my portfolio, particularly what I need to keep it balanced. Banks can be riskier than many investments, but the upside potential is worthy of some research. After its decline a few weeks ago, Capital One flashed on my radar.

Taking the industry into perspective, banks have an upside because the economy is crawling in the positive direction. With housing returning to better days and consumer confidence on the rise, banks will be lending more. These factors are promising, but they are not quite here yet and therefore investors need to be patient. The financial sector may not be keeping pace with the S&P and its eleven percent gain TTM, but it is still in the green at over four percent TTM, even with sell-offs after earnings are released.

Banks that are a step down from the juggernauts don’t seem to get much attention, particularly from a volume perspective. A quick comparison may look strange, but a few things stand out when it comes to managing risk in this tough sector.

*Preliminary statistics for 2012, in millions of USD besides EPS. S&P 500 index data: S&P 500 Copyright © 2013

When dissecting these two companies, differences are numerous but they have both adopted the universal bank model. Both companies offer everything from personal banking to investment services. Although Bank of America Corporation is much larger, it doesn’t have a huge edge in net income, and it’s earnings per share are dwarfed by Capital One. Liabilities are important to examine. They don’t necessarily mean debt, but when it comes to sustainable growth, less money committed to liabilities is better. Virtually every bank is still recovering from the financial crisis, but some of the players in the second tier weren’t hit as hard and are more effectively making a comeback. Capital One is gradually building its free cash flow while Bank of America is trying to break into positive territory. Banks may not have Cupertino free cash, but staying in the green is essential.