Wayman Value Investing - New Stock Recommendation - March 2025
A new position is being added to the Wayman portfolio
# # # New Position # # #
Capital One Financial (COF)
Recent Price: 160.71
Market Cap: 62.49B
P/FCF: 3.69
P/E: 14.14
P/S: 1.17
LT Debt/Eq: 0.60
Projected 4yr FCF: 125.7B
Wayman Portfolio Tier: Stash
Capital One Financial Corporation began its journey in 1988 as a credit card spin-off from Signet Banking Corporation, pioneering the use of data analytics to offer tailored credit products to consumers across the credit spectrum. Headquartered in McLean, Virginia, the company has since evolved into a diversified financial services giant with approximately $471 billion in assets as of mid-2024. Under the leadership of founder and CEO Richard Fairbank, Capital One has expanded beyond credit cards to become one of the nation's largest retail banks and auto lenders, operating primarily in the United States with a customer base exceeding 100 million accounts.
The market's persistent undervaluation of Capital One presents a compelling opportunity that reminds me of the disconnect between perception and reality that often creates the most rewarding investments. Trading at approximately 1.1x tangible book value and 8-9x forward earnings, COF represents the kind of "too cheap to ignore" situation value investors should find attractive. This significant discount to both the broader market and financial sector averages persists despite Capital One's demonstrated ability to generate returns on equity exceeding its cost of capital through multiple economic cycles.
Capital One's competitive positioning deserves particular attention. The company has transformed itself from a monoline credit card issuer into an integrated digital bank with significant scale advantages. Their technology-forward approach has created a cost structure advantage over traditional banks while enabling superior customer acquisition efficiency. Unlike many financial institutions that treat technology as a cost center, Capital One approaches it as a competitive differentiator, having completed their cloud migration ahead of peers and continuing to leverage artificial intelligence for risk management and operational efficiencies.
Credit quality concerns have periodically weighed on the stock, particularly regarding Capital One's exposure to subprime borrowers. However, the company's sophisticated data analytics capabilities and rigorous underwriting standards have historically resulted in better-than-expected loss performance through economic cycles. Management's conservative approach to reserving—maintaining allowances for loan losses above peer averages—provides an additional buffer against economic uncertainty. Furthermore, the company's deliberate strategy of maintaining excess capital levels presents potential for increased shareholder returns through dividends and buybacks, with the current share repurchase program offering accretive deployment of capital at today's discounted valuation.
The pending acquisition of Discover Financial, expected to close in late 2025, represents a potential catalyst that the market appears to be discounting rather than rewarding. This transaction would create the largest U.S. credit card issuer by loan volume while providing Capital One with a proprietary payment network, enhancing long-term earnings power and reducing reliance on Visa and Mastercard. While integration risks exist, Capital One's track record of successfully absorbing and improving acquired businesses—from North Fork Bank to ING Direct—suggests the market is overly pessimistic about execution challenges. As the merger progresses toward regulatory approval and the combined entity's enhanced earnings potential becomes more apparent, a significant rerating of the stock is likely.
In markets increasingly dominated by momentum and growth stories, Capital One represents the kind of overlooked value situation that has historically rewarded patient investors. The combination of a discounted valuation, durable competitive advantages, strong capital position, and identifiable catalysts creates an asymmetric risk-reward profile favoring long-term investors. As I've often observed, the greatest opportunities arise not from predicting the unpredictable, but from recognizing when the market has overreacted to perceived risks while undervaluing fundamental strengths—precisely the situation we see with Capital One today.
Please keep in mind that while some investors might rely on market catalysts when considering what new positions to take, Wayman considers its style to be “catalyst-free investing.” Our reason for purchasing will always be based on our calculations which show a business is worth far more than where the market is pricing it. - Frank Memcaj, Founder of Wayman Value Investing