Enlightened paranoia is a valuable asset when it comes to investing - if something looks too good to be true, it often pays to thoroughly reexamine your assumptions rather than just assume the market has it all wrong. That brings me to the curious case of Capital One (NYSE:COF). I understand concerns that charge-offs and delinquencies will get worse from here, but relative to a healthy labor market and conservative reserving, the valuation here seems to be pricing in some really tough times ahead.
Capital One came through the pandemic-driven downturn in better shape than I'd expected, and in better shape than management had expected given initial reserving decisions. The shares have risen around 90% since my last update - okay relative to large banks, about on par with American Express (AXP) and Discover (DFS), and better than Alliance Data (ADS) and Synchrony (SYF), but the shares have significantly underperformed large banks (by more than 20%) since August of 2021.
I find the valuation curious. Maybe I'm missing something, but even in the context of inflation and credit normalization, the valuation here is pretty appealing if Capital One can generate normalized core earnings growth in the neighborhood of 5%.
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Capital One's Curious Valuation Seems To Be Predicting Tougher Times
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