Capital One shares were higher by 1.06% to $77.49 minutes after the open on Tuesday. Goldman analysts led by Ryan Nash already had a "buy" on Capital One but added the stock to Goldman's "conviction list." Nash expects higher margins from Capital One as credit card growth turns positive in the second half of 2014. He also expects improving expense leverage, payouts rising to 65% to 70%, and increased investor comfort with net chargeoffs of less than 5% long term.
"Combined, these elements should translate to $8+ of earnings over time. As the market becomes more comfortable with this issues, we believe COF's multiple (10.3x 2015E) could trade closer to that of a super-regional bank (11.5-12x), driving further upside," the report states.
Nash downgraded Alliance, on the other hand, arguing the shares had come too far too fast.
"Shares have outperformed by almost 50% the past year and while we are still positive on ADS's long-term growth trajectory, the story is less compelling at current levels. While private label card balance growth could surprise to the upside (we model 17% in 2014), near-term losses could be higher than expected (we see 5.2% in 4Q13 and 5.0% in 1Q14), limiting the beat and raise story," the report states.
Alliance shares were down 2.09% to $252.88 in the first hour of trading.
Nash and his team retained Discover Financial Services on the Goldman conviction list, also pointing to investor "comfort" with sustained low charge-off rates. They also look for continued market share gains in Discover's lending business as investments made in businesses such as checking and student lending and a rewards card known as "Discover it" drive further growth.
Discover shares were higher by 0.59% to $54.68 in early trading Tuesday.
COF data by YCharts
-- Written by Dan Freed in New York.