Capital One Financial Corp (COF-N)

With regulation ahead, it's now more likely that their deal with Discover Financial will finally close--it's been taking forever. If so, COF could go up 25 points. No matter what, COF will be fine.

The merger with Discover creates the largest credit card company in the US. COF's balance sheet is strong.

His favourite in this industry, given the Discover-Capital One merger because he doesn't expect usery fees.

The company itself is fine, but the capital/lending cycle concerns him, where bankruptcies will increase and decrease earnings, buybacks and dividends.

*Short*. The Company derives a good chunk of its revenue through its credit card business of about 40%, and its auto financing business, another 20%. Of that business, approximately one 3^rd is subprime. One weak link in the US market is the subprime market where delinquencies and some of the charges are going to increase. Dividend yield of 2.1%. Thinks the stock can trade down to $59. (Analysts’ price target is $98.)

You have to start with a top-down analysis. Do you like financials? He can make a great case that financials will be much higher 5-10 years down the road. Remember, this is one sector that has never come back from the peaks that they held before the 2008 subprime crisis, so valuations generally are low. Also, it is one of the few groups that can benefit from higher interest rates. He feels this one has an excellent franchise. They are with the credit cards which is a growing way people pay worldwide. They also have some great individual banks.

(Top Pick Jan 9/15, Down 5.91%) He thinks you will have significant credit card growth in the US next year. There is potential for dividend growth.

Decent sized regional US bank with credit cards being a big part of their business. Attractive share price. Trading at about 11X forward earnings. When and if short-term interest rates go up in the US, earnings will grow at a very decent clip. A very strong bank with a very attractive position in the credit card industry. Dividend yield of 1.79%.

This is a play on an increasing consumer spending and loan growth. It has been really hard for the US consumer to get a loan unless they had a pristine credit score. Credit card defaults and mortgage defaults have been the lowest they have ever been. Credit scores at origination have been as high as they have ever been. Eventually, as unemployment continues to get wound down and as consumers feel better because consumer confidence is high, there should be an acceleration of borrowing which plays right into this company. Valuation is reasonable and the balance sheet is in good shape. You should see outsized dividend growth going forward as they start to execute on their buybacks and return capital to shareholders. Credit card receivables in the US are still 15% lower than they were in 2007. Yield of 1.5%.

(A Top Pick July 20/11. Down 8%.) Sold Aug Puts for $1.05. Stock took a severe drop along with a lot of stocks. Could have bought the Put back but because of volatility, the price increased. A way to get around it is to Short the stock, which he did.