Amid the selling on Wednesday and even as financials struggled, Capital One Financial (NYSE:COF) did pretty well. While Capital One stock closed lower by 55 basis points, it was able to bounce hard off its lows and hold its ground into the close. Should that inspire confidence among investors?
It was just one day’s worth of trading. However, there could be reason to bank of Capital One, particularly heading into the back half of 2018. In fact, there are three reasons investors should consider a long position.
Valuing Capital One Stock
The first reason? Valuation.
On a trailing basis, Capital One trades at a semi-attractive 13.4 times earnings. However, earnings are forecast to jump 60% this year to $11.60 per share. That means Capital One trades at just 8.3 times this year’s earnings. That’s an incredibly low valuation, even if forecasts call for a 3% decline in earnings next year.
Sub-10 times earnings is dirt cheap, especially without much decline in earnings after such a big jump this year. Further, analysts expect sales to grow ~3% in each of the next two years. Analysts have become more bullish now as credit quality continues to trend higher for Capital One.
Not that it’s dividend is substantial necessarily, but it does yield 1.65%. That’s a decent payout and should attract investors on some level when combined with the valuation.
Walmart and the Economy
According to reports, Walmart (NYSE:WMT) is choosing Capital One over Synchrony Financial (NYSE:SYF) for its store-based credit cards. Much like how Costco Wholesale (NASDAQ:COST) chose Visa (NYSE:V) over American Express (NYSE:AXP), although it doesn’t make Capital One an exclusive provider.
Still, Costco has been big for Visa and Capital One teaming up with the country’s largest retailer certainly doesn’t hurt business. Throw in the the fact that the economy remains strong and we’re entering the second half, and Capital One stock really should benefit.
Travel season, the holidays, back-to-school, you name it; credit card companies should benefit. Throw in the fact that gas prices are rising too and that should bode well for the group. If prices rise too much, that may crimp spending elsewhere.
But in a strong economy like the one we’re in and with gas prices high (but not too high) we should see good results through the next two quarters.
Trading Capital One Stock
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With the wind at credit card companies’ back and a low valuation, it’s hard to dislike Capital One stock too much. Throw in the fact that it’s chart is looking good and that’s our third reason to consider it on the long side.
The average price target over the last 90 days comes out to more than $121 per share, implying more than 25% upside from current levels. And no, that’s not just according to one or two analysts. That’s the average of seven different price targets in that time.
It includes six buy ratings and one hold, with the lowest price target coming in at $101. That still implies about 4% upside from current levels. The highest target sits up at $135 and implies almost 40% upside.
As for the charts, Capital One has all three major moving averages, the 50-day, 100-day and 200-day, just below current levels. In fact, all three moving averages are within a $1 range between $94 and $95. That should act as great support.
Further, uptrend support is currently near $95 (blue line). Should support fail, investors may want to avoid the stock, which would likely head to $92. There’s resistance near $98 (black line) and downtrend resistance near $99 (purple line). Should Capital One stock push above these marks, it should set up a fresh run to new highs.
Bret Kenwell is the manager and author of Future Blue Chips and is on Twitter @BretKenwell. As of this writing, Bret Kenwell was long V.
