This Credit Card Stock Offers a Good Risk-Reward Proposition
After hitting all-time highs in 2021, Capital One Financial (NYSE: COF) has seen its stock plummet roughly 22% this year, as high inflation, aggressive rate hikes by the Federal Reserve, and concerns over a severe economic downturn have scared away investors.
While there are some headwinds -- including a potentially deteriorating macro outlook which could lead to higher loan losses -- the business is operating well right now, and management seems acutely aware of the risks they face. All of this sets up a good risk-reward proposition when you look at Capital One's valuation. Here's why.
While Capital One's return on equity has come down since its peak in late 2021, it is still generating returns that are well above pre-pandemic levels. In the second quarter, Capital One made a return on equity of roughly 15.8%. Prior to the pandemic, the best return Capital One generated was around 12%. Loan growth continued to come in strong in the second quarter, with period-end loan balances up 6%. Margins have also continued to expand, and Capital One has been repurchasing stock.
Source Fool.com
