The financial sector had a turbulent ride in 2023, as the Fed's accelerated rate-hike campaign played a role in the regional banking crisis, including the failure of Silicon Valley Bank in March. While the CME FedWatch Tool is still pricing in expectations for multiple interest rate cuts this year, today's hot inflation report - coupled with cautious comments from Fed officials - suggests that there's still some uncertainty lingering around the macro outlook.
But for bargain-hunting investors, there are some values to be found in the banking sector right now - and it's worth taking a cue here from investing legend Warren Buffett, a.k.a the “Oracle of Omaha,” who's known for making strategic investments in undervalued stocks. Here's a closer look at one financial sector stock that Buffett keeps stashed in his wallet, right alongside names like Visa (V) and Mastercard (MA).
Is Capital One Stock a Good Value Buy Right Now?
Capital One Financial Corporation (COF) is a bank holding company that specializes in credit cards, auto loans, banking, and savings accounts. It is one of the largest banks in the U.S., and one of the top issuers of Visa and Mastercard credit cards.
Buffett, through his investment conglomerate Berkshire Hathaway (BRK.B), holds a 3.3% stake in Capital One worth about $1.6 billion - or roughly 0.4% of Berkshire's equity portfolio. The value investor scooped up shares of COF for the first time during the first quarter of 2023, when most finance-related stocks were cratering. Notably, during the same quarter, Berkshire sold shares of US Bancorp (USB) and Bank of New York Mellon (BK), making the pickup of Capital One stock that much more significant.
Capital One's stock is up 26% over the past 52 weeks, narrowly outperforming the broader S&P 500 Index ($SPX).
Although it's trading near 52-week highs, Capital One's stock is still a good value play at current levels.
The stock is trading at 10.02x forward earnings, which is lower than the industry average of 10.29. The stock's price/book multiple of 0.92x also represents a discount to its sector peers - and the forward price/sales ratio of 1.34 is lower than not only the sector median, but COF's own five-year average of 1.48. This suggests now is a good time to scoop up shares of Capital One.
Capital One also rewards its shareholders with a steady dividend, with the quarterly payout of $0.60 translating to a forward yield of 1.86%. With a low payout ratio of around 18%, and backed by the company's robust cash position, Capital One is well-positioned to support future dividend hikes.
COF Earnings History and Outlook
In its third-quarter earnings report, Capital One beat Wall Street's expectations by reporting adjusted EPS of $4.45 on $9.37 billion in revenue, with the results driven by strength in the domestic card business. Net interest income rose sequentially and year-over-year to $7.42 billion.
Analysts are looking for COF to report a 4.6% YoY decline in EPS to $2.69 when the company reports its Q4 results on Jan. 25.
Looking ahead to fiscal year 2024, the consensus is calling for bottom-line growth of nearly 8% to $13.81 per share, with revenue expected to rise 4.4% to $38.32 billion. By comparison, the sector median EPS growth forecast for financial stocks is just 5.41%.
What Do Analysts Say About Capital One Stock?
COF is trading at a premium to its average price target of $121.25 from analysts, which is about 5.7% below current levels. However, some analysts have higher hopes for the stock - including Ryan Nash at Goldman Sachs (GS), who calls the stock a “buy” with a freshly hiked $159 price target.
Out of 20 analysts in coverage, the consensus on COF is a “moderate buy,” with 6 “strong buys,” 1 “moderate buy,” 12 “holds,” and 1 “strong sell.”
Given COF's attractive valuation, above-average EPS growth forecasts, and seal of approval from investing legend Warren Buffett, this stock is certainly worth adding at current levels. Plus, the dividend yield and healthy cash flows are a nice bonus for shareholders, too. For investors looking to add exposure in the finance space, Capital One is a stock to consider.
On the date of publication, Ebube Jones did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
