Capital One (COF, Financial) is among our largest holdings and one we leaned into during the first seven months of 2020, as loan loss concerns weighed on its share price. At the end of the first quarter, Capital One had already reserved for losses on its credit card book equal to 11% of loans outstanding, after adding approximately 2.3 points to its reserves in the quarter.3 While we expect the company will add additional reserves in the second quarter, we also observe that management has earned a reputation for recognizing bad news early. Admittedly the economy is experiencing unemployment rates unlike anything since the Depression, but with the bulk of the federal government's stimulus bill geared toward the replacement of wages (e.g., enhanced unemployment benefits, stimulus checks, the Paycheck Protection Program loans), consumers largely have the means to honor their financial obligations (at least through the first few months of this recession, and Congress may do more in the coming weeks). Capital One should soon be able to put reserve-building behind, is capable of earning returns on capital in the mid-to-low-teens over time and is valued at only 0.8x tangible book value.
From Chris Davis (Trades, Portfolio)' Davis Financial Fund fall 2020 review.
