Berkshire Hathaway's Latest Move: Investing in Capital One Financial

Warren Buffett's Berkshire Hathaway adds to its position in Capital One Financial, signaling potential value in the banking sector.

Introduction: Warren Buffett, the legendary investor and CEO of Berkshire Hathaway, has built a reputation as one of the greatest investors of all time. With an annual compound growth rate of about 20%, Buffett's stock picks have consistently outperformed the market. Investors eagerly await Berkshire Hathaway's quarterly 13-F filing, which provides insights into how big investors like Buffett manage their portfolios. In the second quarter, Berkshire Hathaway added to its position in Capital One Financial, a major credit card issuer and retail bank. This move has sparked interest in the potential value of Capital One and its prospects in the banking sector. Capital One: A Leading Credit Card Issuer Capital One is a financial services company that offers a range of products and services, including deposits, loans, and insurance. As the ninth-largest bank in the U.S., with $469 billion in total assets, Capital One operates Capital One Bank and has established itself as a leading credit card issuer. In 2022, its credit cards had a staggering $535 billion in purchase volume, making it the fourth-largest credit card issuer in the country, following JPMorgan Chase, American Express, and Citigroup. Opportunity Amidst the Banking Sell-Off Earlier this year, financial stocks faced challenges due to the collapses of SVB Financial's Silicon Valley Bank and Signature Bank. These incidents led to a broader sell-off in the financial sector, with investors losing confidence in financial stocks. Capital One was not immune to this sell-off and experienced a revaluation lower than its historical averages. At one point, the stock traded at a significant discount to its sales and tangible book value. However, it is important to note that Capital One does not face the same pressures as the regional banks that failed. The rapid deposit outflows experienced by Silicon Valley Bank were partly due to a lack of FDIC insurance on its deposits. In contrast, 78% of Capital One's deposits are insured, providing a sense of stability. Additionally, Capital One's deposits have continued to grow, reaching $313 billion at the end of the second quarter, a 17% increase year over year. Considerations for Capital One Investors While Capital One presents an opportunity for investors, there are certain factors to consider. A significant portion of the bank's customer base consists of subprime borrowers, individuals with credit scores below 670. These borrowers are considered riskier for lenders, as they may have limited or poor credit histories. Approximately 30% of U.S. consumers fall into the subprime credit score category, according to Experian. At the end of the second quarter, 48% of Capital One's auto loans and 31% of its credit card loans were extended to subprime borrowers. This poses a potential risk in an economic downturn, as these borrowers may struggle to repay their loans. In the second quarter, Capital One charged off 4.4% of its total credit card loans, up from 2.3% in the same period last year. To mitigate these risks, the company has increased its allowance for credit losses on credit loans to $10.9 billion, providing a cushion in case charge-offs continue to rise. Conclusion: Berkshire Hathaway's increased investment in Capital One Financial highlights the potential value in the banking sector. Despite short-term volatility and potential economic headwinds, Capital One's stock trades at a slight discount to book value, offering a margin of safety. Investors looking for opportunities in the financial sector may consider opening a small position in Capital One, with the potential to add more if the stock dips further below book value. As always, thorough research and consideration of risk factors are essential when making investment decisions.