October had to be one of the toughest times for Merrill Lynch & Co. analyst Michael R. Hughes.

Mr. Hughes, who had been pounding the table for Capital One Financial Corp. throughout the preceding year, watched as shares of the Falls Church, Va., credit card company plunged 31.4% in three days.

"Those were pretty miserable days," said Mr. Hughes, who was on vacation in Hawaii at the time. "Every morning I had to get up at 4 a.m. to return phone calls. People were asking me how could I still recommend the stock."

Capital One's stock was not the only one taking a beating. Most of Mr. Hughes' coverage list, which included credit card and general finance companies, were leading the market down as investors grew anxious about the possibility of a recession in 1999. And Mr. Hughes had "buy" recommendations on most of his companies.

"There was a lot of pressure to cut ratings," he said. "But we maintained our 'buy' rating on Capital One. Fundamentally it was the right call."

The strategy paid off. In American Banker's Wall Street Sharpshooters survey, compiled by First Call/Thomson Financial, Mr. Hughes, 38, was ranked No. 1 among credit card analysts in predicting earnings.

This is Mr. Hughes' third time in the winner's circle. He won for coverage of government-sponsored enterprises in 1996 and of general finance companies in 1995.

"We try to base our estimates on what the company can earn instead of what the company tells us they can earn," Mr. Hughes said. "In the stock- picking world, some downgrade because of psychology. Fundamentally that is a crummy call. I won't do that. I'm not Sigmund Freud."

Paul Paquin, vice president of investor relations at Capital One, recalled Mr. Hughes' collecting of credit card solicitations from people at Merrill Lynch.

"That way he was abreast of the different kinds of products and services each company offered," said Mr. Paquin, who has known Mr. Hughes for more than a decade. "He would already have his finger on the pulse of the market before he came to take the pulse on us."

Mr. Hughes remains bullish on credit card and finance companies because the economy is strong, loss trends "are gosh darn small," and balance sheets are robust.

One of his favorites is CIT Group Inc., a New York diversified finance company that recently announced plans to merge with Newcourt Credit Group, a Canadian finance company.

Alone, both companies are adequate performers, Mr. Hughes said. "Together, they create a fast-growing company with a cheap multiple and a strong balance sheet."

Other favorites include Providian Financial Corp. and, of course, Capital One because of their nonprime lending programs geared to immigrants, college students, and customers trying to repair credit ratings.

Providian and Capital One handle the additional risk very carefully, Mr. Hughes said.

"They are frugal with their credit lines," he said. "If you just lend $1,000, you just lose $1,000. But if a prime customer goes bad, chances are you could lose $5,000 or $10,000."

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