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Foolish Capital One Bulls

Written By Brian Hicks

Posted April 21, 2008

Capital One (COF) became a recommended buy for the naïve this morning because it has a P/E of 12 and is expected to grow earnings at more than 12% over the next few years.  It was the reason why "Capital One should be in your portfolio" said the article. 

But that’s ridiculous… Housing and car loans are seeing a rise in delinquencies, and credit card companies are okay?  It doesn’t work that way.  Capital One expects further credit deterioration and just increased their loan loss allowances by $310 million. 

Just because a company has a low P/E doesn’t make it a buy. Homes are no longer personal ATMs.  Credit cards are. 

Meanwhile, the American Bankers Association is telling us that Q4 consumer credit delinquencies are at 16-year highs, predicting that delinquencies will continue to rise in the first half of 2008, and warning that there’s "no relief for consumers in sight" thanks to higher food and gas prices, and poor income growth.

More than 2.6% of all bank loans are 30-day delinquent… and that was just in Q1 2008. It’s the highest since 1992.  Home equity loan delinquencies nailed a two-year high. And delinquencies on lines of credit just hit levels not seen in 11 years.

So where’s the upside for the credit lenders?  There is no upside.

Most recently, credit card write offs have reportedly soared 24% in a year.  Late payments are up a staggering 16%.  Think about this.  As of December 2007, Americans held $944 billion in revolving debt, most falling on credit cards. 

Yep, that bad news sure makes Capital One a buy… well, if you’re naïve and want to lose lots of money.  But, hey, it has a P/E of 12 with a 12%+ growth rate over the next few years.  That makes it a buy, right?