The Risk/Reward of invest­ing in Cap­i­tal One’s stock looks Very Dan­ger­ous to me. There is lots of down­side risk given the Mis­lead­ing Earn­ings and there is lit­tle upside reward given the already-rich expec­ta­tions embed­ded in the stock price.
RED FLAGS:
1. Mis­lead­ing Earn­ings: COF reported a $399mm increase in GAAP earn­ings while our model shows eco­nomic earn­ings declined by $1,783mm.
2. The company’s ROIC is in the Bot­tom Quin­tile of all the com­pa­nies we cover.
3. Stock price of $40.69 implies COF must grow its NOPAT at 15% com­pounded annu­ally for 15 years.