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Capital One - Bull Numbers Analysis

 April 11, 2008 10:37 AM

Thursday April 10, an article posted by Morningstar's Ganesh Rathnam discussed some wonderful ways to profit from selling PUT options against the shares of Capital One (COF) as the author believes that the market has it wrong. Remember, the analyst is suggesting a bullish strategy.

Here are the highlights of the analyst's report and a few comments:

We believe these fears are overblown. Capital One, in our opinion, has all the tools to fight these fires. Ever get notices from your credit card company warning you of a stiff impending rate hike? Well, there's Capital One's first tool: its ability to reprice loans almost at will to meet higher credit costs. It can also raise fees and change the minimum required payments on cards so that consumers must pay off their loans faster.

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So, Mr. Rathnam, Capital One should just abuse their current customers and demand that they pay for the problems associated with the remainder of the company. Wow, I do not want to be your client! Also, have you noticed that there is pending legislation to stop these types of egregious practices? And one more thing…. kindly see this little item about COF capping fees for cardholder. Maybe you missed this piece that discusses how Capital One is freezing the variable rates on some card and converting them to fixed.

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After the acquisition of two banks, North Fork and Hibernia, only 44% of the company's managed loan portfolio consists of credit card receivables, compared with nearly 100% a few years ago. Additionally, Capital One has a history of writing high-quality loans and managing credit risk. In fact, net charge-offs have trended lower in each of the past four years, declining to 2.88% of managed loans in 2007 from 5.86% in 2003

Charge-offs trending lower? What information are you looking at? The latest report released yesterday shows a 13% increase in charge-offs since December, 2007. Moreover, you should know this: Charge-offs decline during economic expansions. We are in a totally different market condition now. Also, write-offs PEAK just prior to an economic recovery. The latest 8-K reports charge-offs are 4.11% for managed and 5.46% for national lending.

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