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Stock Strategist

Leading the Charge in the Credit Card Comeback

Undervalued Capital One benefits from improving U.S. consumer and overall economy.

As the U.S. economy continues to rebound, we expect Capital One to be a prime beneficiary of a healthier consumer who is more willing to spend. In the years after the financial crisis, Capital One has been carried by its automotive and commercial lending lines as the U.S. consumer shed unsecured lending. Now, credit cards are primed to take the spotlight again as a growth engine for Capital One, a fact that we think investors aren't recognizing. Credit card lending growth was strong in 2014, a trend we expect to continue in 2015 thanks to lower unemployment, solid gross domestic product growth, and increasing disposable income. As one of the largest issuers of credit cards, Capital One will be in the driver's seat. With its overall diversification across automotive and commercial lending, we see no reason why the undervalued Capital One shouldn't be valued similarly to strong regional banks such as U.S. Bancorp or PNC Financial.

Strengthening U.S. Economy Bodes Well for Card Issuers
We consider this to be an ideal economic environment for Capital One to outperform peers, which investors have not seemed to realize. In short, the following economic factors, which continue to improve, support our thesis for Capital One: GDP growth within a healthy range of 2.5%-3.0%; increased contributions from consumer spending to overall GDP growth; and lower unemployment, which generally correlates with improved consumer confidence.