The Smartest Bank Stock to Invest $500 In Right Now

Bank stocks could be one of the biggest beneficiaries of the Federal Reserve's rate cuts, which are widely expected to continue for at least the next couple of years. They could also benefit from the loosening regulatory environment and lower corporate tax rates that could come with the incoming presidential administration.

However, one company that looks especially attractive right now is Capital One Financial (COF -0.08%), which is best known for its credit card business. Here's why I think it could be the best bank stock to buy right now.

A highly profitable bank at an attractive valuation

As you probably know, Capital One specializes in credit card lending. Roughly half of its outstanding loan balances are from credit cards.

The high-interest nature of the credit card business makes Capital One an exceptionally profitable bank. It has a net interest margin of more than 7%, while most big U.S. banks are happy to generate NIM in the 3% range. Capital One's efficiency ratio is far better than its peers, and charge-off rates are improving after a post-pandemic spike.

With the stock just 5% below its 52-week high, Capital One certainly isn't as cheap as it was earlier in 2024, but the stock is higher for a reason. The falling-interest rate environment could be a catalyst for the bank, and many investors are excited about the pending acquisition of Discover Financial Services (DFS -0.03%), which I'll discuss.

However, at a valuation of just 1.16 times book value and less than 13 times forward earnings estimates, Capital One is significantly cheaper than its peers. As an example, Bank of America has a price-to-book multiple of 1.35, while JPMorgan Chase trades for more than twice its book value.

To be fair, this is mainly because of the increased risk that comes from Capital One's concentration in the credit card business. But if you believe (as I do) that the U.S. economy will be strong for the next few years, the stock could be a bargain.

Lots of interesting possibilities in the future

Capital One announced its intention to acquire rival Discover in February in an all-stock transaction, and this could be a bigger deal than the market is giving it credit for.

First, the obvious benefits: A combined Capital One and Discover would have a massive credit card business. Capital One has about 100 million credit card customers, while Discover has even more. Plus, the two banks offer lots of complementary, not overlapping, products. Discover's cards are typically of a cash-back nature, while travel credit cards like Venture are Capital One's bread and butter.

There are also the synergies involved with Discover's closed-loop payment network. In other words, instead of relying on payment networks like Visa and Mastercard, Discover processes its own payments in addition to acting as the lender. In fact, between expenses and network synergies, Capital One expects $2.7 billion in cost savings by 2027.

However, the payment network could have deeper implications if Capital One chooses to use it to process payments on a third-party basis for other banks (like Visa and Mastercard do). Payment processing is a highly profitable business, and if Capital One decides to invest in the growth of Discover's network, it creates some interesting possibilities.

A strong environment for banks

There's also the political environment to consider. During the first Trump administration, there was a solid case to be made that no industry benefited more from policy changes than banks. Looser regulations make it easier for banks to profit (and complete mergers), and lower corporate taxes disproportionately benefit banks. While many of the specific policy goals of the new administration aren't clear yet, we could be entering another strong growth environment for the banking industry.