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Are Expectations Too Low for Capital One Financial Corporation Ahead of Earnings?

Examining technical and sentiment data for a financial concern ahead of earnings

by Jocelynn Drake (jdrake@sir-inc.com) 10/15/2008 2:12 PM


Keywords:

COF

stocks

options

Capital One Financial Corporation (COF: View sentiment for COFsentiment, chart, options) is set to step into the earnings spotlight after the close on Thursday, October 16. Analysts are currently forecasting a profit of $1.01 per share, a vast improvement over the company's year-ago loss of 21 cents per share. Historically, the company has missed the consensus estimate twice and beaten twice in the past 4 quarters.

For those unfamiliar with COF, the firm is one of the top credit card issuers in the U.S. The company offers Visa and MasterCard plastic with a variety of rates, credit limits, finance charges, and fees. Products range from platinum and gold cards for preferred customers to secured and unsecured cards for customers with poor or limited credit histories. The company, which boasts some 50 million customer accounts, also provides auto financing, credit insurance, and other consumer lending products. It has banking operations in the Northeast and the South, and is one of the largest bank holding companies in the U.S. with some 500 branches.

Heading into the earnings report, options players have very low expectations for the shares. The Schaeffer's put/call open interest ratio for COF stands at 2.19, as put open interest more than doubles call open interest among near-term options. This reading is also higher than 78% of all the readings taken during the past year. In other words, short-term options players have been more pessimistically aligned toward the shares only 22% of the time during the past 12 months.

A preference for puts can also be seen on the International Securities Exchange (ISE) and the CBOE. On Tuesday, the ISE reported that 49 calls were bought to open compared to 1,417 puts, resulting in a put/call volume ratio of 28.92. The CBOE also saw 190 calls purchased compared to 5,448 puts purchased, resulting in a put/call volume ratio of 28.67.

What's more, the ISE shows that during the past 10 trading days, the stock has averaged a put/call ratio of 5.75. In other words, 5.75 puts have been bought to open for every call purchased over the past 10 days. This preference for puts during the past 2 weeks indicates that investors have very low expectations for the shares heading into their earnings report.

Options players aren't the only ones who are pessimistic toward the shares. Wall Street is also giving the stock the cold shoulder. According to the latest data from Zacks, the stock has earned 1 "buy" rating, 5 "holds," and 5 "sells." This bearish configuration leaves ample room for potential upgrades should the company post stronger-than-expected earnings tomorrow.

Short sellers have also flocked to this financial stock. More than 51.6 million shares have been sold short, accounting for roughly 12% of the company's total float. A positive earnings report could shake loose some of these bears, adding to the buying pressure on the shares.

Technically speaking, the stock's performance hasn't done much to earn it any praise. The stock has been locked in a downtrend under its 10-month and 20-month moving averages since March 2006, resulting in a loss of more than 55%. More recently, the stock has settled into a sideways channel between resistance at the 58 level and support at the 38 level since November 2007. The equity is in the process of bouncing off its low at the 32 level and has climbed back above support in the 38 region.

MONTHLY CHART OF COF SINCE AUGUST 2005 WITH 10-MONTH AND 20-MONTH MOVING AVERAGES

Overall, traders should keep a close watch on the sentiment indicators as the company's earnings announcement approaches. Should put open interest continue to build, it could indicate that expectations are extremely low for the shares. A positive earnings report from COF could see the shares rally sharply as the bears abandon their short positions.

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