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Low Rates, High Costs Hurt Capital One (COF): Time to Sell?

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On Aug 31, 2020, we issued an updated research report on Capital One Financial Corporation (COF - Free Report) . While the company remains on track for improvement in profitability on the back of strength in its card business, inorganic growth efforts and a solid liquidity position; near-zero interest rates and deteriorating asset quality are major headwinds that might hamper financials.

Moreover, analysts do not seem very optimistic regarding the company’s earnings growth potential. This is because, per the Zacks Consensus Estimate, Capital One will report a loss of $2.45 per share in 2020. The loss estimate has been unchanged over the past seven days.

Thus, the company currently carries a Zacks Rank #4 (Sell).

Capital One’s price performance also does not seem encouraging. Its shares have lost 24.5% over the past six months compared with a decline of 15.9% of the industry it belongs to.






Looking at fundamentals, the company’s expenses have witnessed a CAGR of 4.5% for the last five years (ended 2019), with the uptrend continuing in the first half of 2020. As it continues to make investments in technology and infrastructure, overall costs are expected to remain elevated in the near term.

Moreover, over the last several quarters, Capital One’s net interest income and net interest margin remained under pressure due to lower interest rates. In fact, a similar trend is expected to continue in the near term as the central bank has signaled no rate hike in the near future.

Further, the company’s provision for credit losses and net charge-offs have been steadily rising. Though provisions and NCOs declined in 2018, these witnessed a CAGR of 8.3% and 14.1%, respectively, over the last five years (2015-2019). Due to concerns related to the coronavirus outbreak, both provisions and NCOs increased in the first half of 2020 as well.

Notably, based on the Fed’s new cumulative earnings rule, Capital One lowered its dividend to 10 cents in July (a cut of 75% from the prior payout) although its capital plan included maintaining dividend payout at 40 cents per share. Moreover, the company suspended its share buyback program. This is bad news for retail investors and is expected to hurt shareholder value.

Stock to Consider

A few stocks from the finance space worth a look are mentioned below.

ETRADE Financial Corporation (ETFC - Free Report) witnessed an upward earnings estimate revision of 19% for the current year over the past 60 days. Its share price has increased 15.3% over the past three months. It currently carries a Zacks Rank #2 (Buy).

Interactive Brokers (IBKR - Free Report) witnessed an upward earnings estimate revision of 26.9% for the current year over the past 60 days. Its share price has increased 23.6% over the past three months. It currently carries a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for TD Ameritrade Holding Corporation’s (AMTD - Free Report) current fiscal-year earnings has been revised 21.7% upward over the past 60 days. Its share price has decreased 1.2% over the past three months. The company currently sports a Zacks Rank #1.

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