Capital One's Erratic Stock Returns to Investors' Favor

Few companies illustrate investors' love-hate relationship with financial services stocks this year better than Capital One Financial Corp.

Last week was a Wall Street love-in for Capital One, as investors bid up its shares 15.4%, to $116 by Friday afternoon, outperforming such banking companies and other competitors as MBNA Corp., Providian Financial Corp., and American Express Co. For the year the stock was up a stunning 115.5%.

But it hasn't been a smooth ride to the top.

In the four days from Oct. 5 through Oct. 8, Capital One shares plunged 36%, to $62.0625, from $96.625.

At the time, all financial stocks were taking a beating. But Capital One was hit especially hard because it gets funding from selling securities backed by credit card receivables. Investors shunned all but the safest bonds in August and September, and with no assurance that the market for Capital One's asset-backed securities would return soon, they feared its rapid growth was over and dumped the stock.

But in recent weeks investors have resumed buying asset-backed securities from credit card issuers, and Capital One has cheered up investors with solid earnings reports and optimistic predictions. The company expects 1999 earnings per share to grow 30%.

Still, investors tend to binge or purge this stock. Capital One shares fell 8.9% the week of Dec. 5 after the chief financial officer said he would leave the company.

Though most analysts dismissed the notion that the CFO's exit was evidence of management turmoil, they agreed that Capital One is one of financial services' most volatile stocks.

Part of the reason, said Fox-Pitt Kelton Inc. analyst Michael Granger, is that investors don't fully understand how the company achieves its eye- catching profits.

Most investors, he said, consider Capital One strictly a credit card company, which means it would be vulnerable to trends in chargeoffs, the whims of the securitization market, and the vicious competition for new accounts that is the industry's hallmark.

But part of the reason Capital One's earnings are growing so fast, he said, is that the company diversified. It has begun reselling time on cellular phones under the brand America One, for example.

Fourth-quarter earnings are expected to be as robust as the third's, when they were 42% higher than a year earlier.

"We've been saying 40% growth, and we're still saying that," said spokeswoman Diana Sun.

But this rapid growth may contribute to the volatility of the company's share price. Capital One's top shareholders include such mutual funds as Neuberger/Berman Guardian, AIM Constellation, and Capital Research and Management Co.'s "growth" funds.

These funds invest in companies whose earnings are expected to grow rapidly. But at any hint that earnings could fall short, they may sell.

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