Guru trades
Chris Davis (Trades, Portfolio), Dodge & Cox, Hotchkis & Wiley and David Dreman (Trades, Portfolio) all added to their positions in Capital One Financial Corp. (COF, Financial), while Tom Gayner (Trades, Portfolio) and Ken Fisher (Trades, Portfolio) initiated new positions. Dodge & Cox now owns over 9% of the company.
Valuation
With trailing 12 month diluted EPS of $7.21 and a stock price of $76.97 as of Nov. 13, the company is trading with a PE of less than 11x. The company is also trading below 0.9x diluted book value per share of $87.34 and has a dividend yield over 2%. The cheap valuation has certainly played a part in many gurus adding or initiating a position. In addition, Capital One reduced common shares outstanding by 7.6 million shares during the third quarter as the company continues to buy back shares at attractive valuations.
Brief thesis
Capital One is down significantly from its 52-week high of $92.10 as concerns over increasing charge-offs, U.K. litigation reserves and competition in both credit cards and auto loans have taken a toll. Yet long-time CEO Richard Fairbanks continues to build what is now the seventh-largest bank in the U.S., the fourth-largest credit card company and fourth-largest auto loan book.
Operationally they are well-run, which can be seen by their very low efficiency ratio of only 53.56% and very high net interest margin (NIM) of 6.73%. Over time the company has increased their deposit base from about 30% of total liabilities in 2004 to well over 70% in 2014. This has given them a lower cost funding source. The company has become more diversified as well, with credit cards accounting for less than 50% of total loans outstanding. Auto and commercial loans now constitute a larger allocation. Furthermore, the company has a strong capital base with a common equity Tier 1 capital ratio under Basel III standardized approach of 12.1%.
Conclusion
Capital One is a well-capitalized bank that is repurchasing shares at what appears to be attractive valuations. With several gurus increasing their position in this well-run company, it may be a good time to look into initiating a position.
