With multiple bank failures, 2023 has been a tumultuous year for the banking sector.
Stock prices in the sector have been driven down as investors have run for the exits.
Because when banks start failing, investors sell first and ask questions later.
Whenever fear engulfs a sector like this, it is always worth wading in to see if the sell-off has created opportunity.
For one financial stock, a couple of legendary investors believe that it has.
It was recently revealed that both Warren Buffett’s Berkshire Hathaway (NYSE: BRK-A) and hedge fund (and The Big Short) superstar Michael Burry have been piling on shares of Capital One Financial (NYSE: COF).
Capital One is the only financial stock that Buffett has bought during the sell-off in the sector this year. And he’s actually been unloading shares of other financial companies.
As you can see, Capital One’s share price has certainly had a rough ride. The stock has been nearly cut in half since peaking in August 2021.
Capital One is a little different from most banks.
Its primary focus is not on providing mortgages to homebuyers. Rather, Capital One’s main lending is done through its credit card business.
When the company went public in 1994, it was fully focused on credit cards. Since then, it has added other lending products.
As of the end of the first quarter, Capital One’s loans are split between credit cards ($135 million), commercial loans ($94 million) and consumer loans ($79 million).
This loan portfolio is currently performing fine. Delinquency rates are right in line with pre-pandemic levels.
The big fear in the financial sector has been caused by banks suffering a “run on deposits.”
These runs are what have caused the bank failures we have seen so far in 2023.
Capital One has not only not lost deposits so far in 2023 but through the end of the first quarter actually increased its deposit base.
The vast majority of Capital One’s deposits are insured. That characteristic was absent in the banks that have experienced rapid deposit outflows in 2023.
Capital One depositors have no reason to flee.
While the business is performing well, the valuation on the stock looks even better.
The consensus analyst estimate is for Capital One to earn $11.99 per share this year and $14.11 in 2024.
With shares currently trading around $91, that means the company is trading at just 7.58 times 2023’s earnings and 6.45 times 2024’s earnings.
Those are cheap multiples for a company that has soundly trounced the return of the market since it went public in 1994.
On top of that, Capital One is also paying a $0.60 quarterly dividend, which equates to a 2.6% yield at the current stock price.
I’m starting to see what attracted Buffett and Burry…
The stock is cheap…
The dividend yield is solid…
The loan portfolio is performing well…
And the deposit base has not just held up but grown.
The Value Meter rates this financial business as “Slightly Undervalued.”