"Is It Safe?" is a daily feature by TheStreet.com Ratings that looks at a company's risk-and-reward potential. Find out if your stocks are safe each morning at 4.
Capital One Financial (COF) has been outrunning rivals for the past three months with a return of 92% versus 38% for the S&P 500 financial sector index. Even though it's outperforming and undervalued, the credit card company faces an uncertain future.
Since the start of the credit crisis, many have been expecting an avalanche of credit card defaults as consumers lose their jobs and struggle to repay loans. While that hasn't happened yet, Capital One warned earlier this week that charge-off rates were rising.
Capital One's highly geared balance sheet makes it especially vulnerable to charge-offs, loans deemed uncollectable. With about six times more debt than equity and credit cards providing 62% of sales, even a moderate decrease in card revenue would hurt profits. The McLean, Virginia-based company's charge-off rate rose 85 basis points in the past month to 9.4%. It's faring better than American Express (AXP), which has a charge-off rate of 10%, but lags behind the 8.3% rate at Discover Financial Services (DFS). Charge-offs occur when credit card loans go unpaid for 180 days, leading the company to write down the loan and interest. On that basis, today's charge-offs came from accounts that became delinquent in mid-December, before huge increases in joblessness. The amount of uncollectable loans will likely rise as the defaults of more recently unemployed customers reach the 180-day mark. Capital One swung to a first-quarter loss of $111.9 million from a year-earlier profit of $548.5 million. The results follow a $1.42 billion loss in the fourth quarter.
Select the service that is right for you!COMPARE ALL SERVICES
Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.
- $2.5+ million portfolio
- Large-cap and dividend focus
- Intraday trade alerts from Cramer
- Weekly roundups
Access the tool that DOMINATES the Russell 2000 and the S&P 500.
- Buy, hold, or sell recommendations for over 4,300 stocks
- Unlimited research reports on your favorite stocks
- A custom stock screener
- Upgrade/downgrade alerts
Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.
- Diversified model portfolio of dividend stocks
- Alerts when market news affect the portfolio
- Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.
- Real Money + Doug Kass Plus 15 more Wall Street Pros
- Intraday commentary & news
- Ultra-actionable trading ideas
Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.
- 100+ monthly options trading ideas
- Actionable options commentary & news
- Real-time trading community
- Options TV