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Motley Fool: Track record, stability boost Capital One

Sun., July 20, 2014

Pedestrians walk past a Capital One Bank branch in New York. (Associated Press)
Pedestrians walk past a Capital One Bank branch in New York. (Associated Press)

It may seem like you’ve arrived too late to profit from stocks trading near their 52-week highs, but that’s not always the case. Consider Capital One Financial Corp. (NYSE: COF), the successful consumer and commercial banking franchise with a strong market position in credit cards, auto loans and home loans.

Capital One has a convincing track record in growing its core business segments and has become the 13th-largest domestic bank in terms of total assets. Thanks to cyclical tailwinds generated by higher consumer spending, Capital One’s business segments should experience significantly higher demand, which should translate into higher share prices.

Indeed, in May the bank reported its first uptick in domestic credit card loan growth in almost a year. (A recent study by CardHub ranked Capital One first in offering cards with the fewest limitations on their rewards.)

Capital One is resilient. During the financial crisis, its losses were small and it exceeded 2006 profitability levels as early as 2010. Thanks to its strong balance sheet, the bank plans to funnel back substantial amounts of cash to shareholders in the form of dividends and share buybacks.

Capital One is worth considering for your portfolio. Its recent P/E ratio of 11.6 is below its five-year average of 14.1, and it offers a 1.4 percent dividend yield. (The Motley Fool owns shares of Capital One Financial.)

Q: What does it mean when a company is said to have a moat? Surely it isn’t headquartered in a castle, right? – G.L., Milwaukee

A: Well, think of a company as being an imaginary castle. If it has a wide moat, it will be well defended, making it hard for any enemies to attack it. In business jargon, an economic moat refers to sustainable competitive advantages that a company may have that protect its market position and defend against competitors or would-be competitors.

Examples include brand power, switching costs, patents, economies of scale and barriers to entry. It’s hard for upstarts to compete against a powerful brand, and hard for any company to enter certain industries where start-up costs are steep (think airplane manufacturing, for example). Switching costs can keep many customers from changing to a different cellphone carrier or platform.

Q: I noticed recently that trading in General Motors stock was “halted” for some reason. What’s halting all about? – B.W., Pensacola, Florida

A: Trading halts are called when a company is about to announce some big news or when there’s a big order imbalance that needs to be corrected. Trading was halted for General Motors because there was “news pending” – the company announced a big new round of recalls (7.6 million vehicles) and a big increase in the cost it expects to incur repairing the recalled vehicles. Trading was halted for about half an hour. The stock had been up by less than 1 percent before the halt, and when trading resumed it was down more than 1 percent.

Trading was halted in GM’s stock so that no one would be buying or selling shares without the benefit of the new information.

My dumbest investment

I bought shares of Netflix at $10 per share. I watched it get to the high $50s and then swoon, falling to the mid-$40s. I decided to get some income from the stock, so I sold a call option on it with a $60 strike price, so that whoever bought the option could buy my shares for $60 during a certain period.

Well, that was dumb. Netflix moved past $60 so quickly that it made me dizzy. I got my $60 per share, but I missed so much more. Lesson: Ride your big winner the few times you have one and use trailing stops to lock in profits. – J.M.L., San Diego

The Fool responds: You’re right; with Netflix shares recently surpassing $470 per share, you missed a bundle. It might help to think about each of your holdings and jot down why you’re holding it – say, for income or for growth. And be careful with trailing stop-loss orders, which instruct your broker to sell if the stock falls by a certain amount. They could eject you from the stock prematurely, due to temporary volatility.


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