Discover Financial Services (DFS), Wells Fargo & Co (WFC): Why This Financial Company Offers Good Upside

Good Value?

Evaluations are attractive, but these stocks will not have such good value if lending doesn’t come back. My point is that if the economy continues to improve then at some point loan demand will surely return. However if it doesn’t (or if the same weak environment ensues) then I would rather be invested in a financial with a traditionally conservative approach to lending. In this regard I think Capital One is a good option.

Drilling down into the details of Capital One’s latest numbers it’s clear that it expects run-off to continue this year and the next. It plans for $12bn in 2013 and then a further $8.5 billion in 2014. So while its credit performance is good, consumer demand is still weak. It would be understandable if its management then decided to chase growth in areas like auto loans (which grew $800 million); however its auto loan originations declined by $500 million in the quarter as they refused to chase low quality loans.

In essence Capital One is a more conservative lender that still gives exposure to the upside of an improving economy. The fact that areas like auto loans have offered growth to lenders hasn’t caused Capital One to create potential areas of weakness in its loan book which could then threaten the company’s ability to lend in future.

Moreover, it is planning to use its capital appreciation to reward investors with buybacks and is already in talks with regulators about this.

The bottom line

Capital One offers a solid way to get exposure to the financial sector without too much risk. I think investors should take this into consideration rather than just looking for broad-based financial exposure.

Its evaluation is not expensive on a price to book basis, and a dividend yield north of 2% plus the prospects of further capital returns to shareholders offers upside prospects if the economy continues to grow.

The article Why This Financial Company Offers Good Upside originally appeared on Fool.com and is written by Lee Samaha.

Lee is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

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