Goldman is wrong about Capital One
New rules may usher in a new era of profits for credit card companies.
Wall Street should be in the publishing business, because financial companies are wonders at crafting stories.
The supposed justification for the downgrade came from expected decreases in loans, an increase in February delinquencies and worries about late fee rules that could reduce sub-prime revenue by 5-10%.
On the surface the downgrade appears credible, but that is the point of quality story telling. The downgrade ignores two factors that will be a boon for Capital One.
I know enough about the inner workings of Wall Street that I have to suspect the analysts are hoping to pump up trading volume, and that there might be a wee bit of short selling of the stock for the benefit of Goldman’s best clients and its own book of business.
They get these sorts of reports first, and they're often a self-fulfilling prophecy (though Capital One stock is up today.) Understand that there is nothing inherently wrong with what Goldman may be doing, but investors need to consider such things when digesting information from Wall Street.
The problem, rather, is that with this downgrade is that there is no mention of the possible impact on earnings of the new credit card rules that took effect on Feb. 22, 2010.
Those new rules were designed include notification requirements on changes to terms in addition to disclosure of payment length on minimum payments among other things designed to help the consumer.
But those rules will also help the credit card companies in several ways that make stocks of Capital One (COF), American Express (AXP) and Discovery Financial (DFS) all quite attractive on the long side.
The second shortcoming is a misreading of the loan delinquency issue. One of the biggest concerns for investors in credit card companies, mentioned in the Goldman downgrade of Capital One, relates to this.
When these stocks collapsed in 2008, the fear was that credit cards would meet a similar fate as mortgage securities. Even though that fate never materialized and credit card stocks rallied, there remains a large overhang on the sector by those that believe that delinquencies and defaults will only increase over time.
My expectation now is that loan delinquencies will drop, for Cap One and other issuers, because of the new rules. When consumers see the deleterious effect of making only minimum payments they will work harder to pay off expensive debt.
In addition, many credit card companies increased rates in advance of the rule changes that will result in an increase in revenues in the short term. Doing so may be a bold move from a PR perspective, but such rate hikes will do wonders for earnings.
I don’t believe the Goldman downgrade takes into account either of these two positives for credit card stocks. I would be a buyer of Capital One, not a seller. Here are 10 stocks I would consider buying.
Copyright © 2014 Microsoft. All rights reserved.
Serious issues like drought and the deterioration of the developed world spell opportunity for this industry leader.
VIDEO ON MSN MONEY
Top Stocks provides analysis about the most noteworthy stocks in the market each day, combining some of the best content from around the MSN Money site and the rest of the Web.
Contributors include professional investors and journalists affiliated with MSN Money.
Follow us on Twitter @topstocksmsn.