Tom Brown Declares War on RealMoney as COF Battle Goes Nuclear

Discussion in 'Wall St. News' started by AAAintheBeltway, May 4, 2004.

  1. For some time Peter Eavis has posted disparaging columns about COF. He tore into the company after it reported last week. Tom Brown, a former top-rated bank analyst who runs a hedge fund, challenged him. Now Brown has posted a direct personal attack on Eavis, calling him a lackey for David Rocker. It's interesting that JIm Cramer has often touted Brown as one of the best financial company analysts around. From Brown's column at

    "Clueless at Monday, May 03, 2004
    Thomas K. Brown More by This Author...’s Peter Eavis has been so spectacularly, utterly, and completely wrong on Capital One for so long, it’s hard to chalk up his mistakenness to simple incompetence. There must be something more: even know-nothings will eventually come to the conclusion they don’t know what they’re talking about, and move on.

    But not Peter. He keeps blazing away quarter after quarter, year after year, with the same twaddle, even after it’s been shown to be twaddle. And he keeps making stuff up, concocting baseless managements smears—seemingly for the sake of smearing. And the stock just keeps going up!

    Why does he keep at it? My guess—and it’s only a guess—is that he’s under orders from David Rocker, the short seller and major shareholder in The, to keep bashing the stock to help Rocker’s short position. But we may never know that for sure. The’s backers refuse to disclose their short positions, and Eavis himself, sanctimonious when it comes to disclosure by others, is quick to exempt himself from his own standards.

    (For the record, by the way, the investment partnership I run has a large position in Capital One, and I have owned the stock personally since the company came public in 1994.)

    In all of his ravings, Eavis fails to include a number of facts that one would think would be relevant to an interested investor. Like, for instance, that Capital One’s earnings have grown at a compound annual rate of 30% since the company came public, and that its stock price has risen at a 31% compound annual rate over that time. Neither has Peter mentioned that Capital One’s performance record over the past decade has ranked among the very elite in corporate America.

    No, all Peter sees is doom, gloom, and imaginary unethical business practices. It’s hard to imagine how he could be more wrong.

    To see just how off base Peter has been on this company, go back and read what he wrote following the company’s first-quarter earnings report a year ago. Capital One, recall, had reported spectacular results, up 62%, to $1.35 from 82 cents the year before—a whopping 32 cents ahead of expectation. But Peter, missing the boat completely, complained that the earnings blowout was “low quality” and accused the company of skimping on reserves and underspending to artificially inflate result. “The company stretched in more directions than one might think humanly possible to make its earnings number,” he wrote, “Most important about these antics is that they can't be sustained for more than a couple of quarters, which implies the company is trying to project the impression of strong earnings to attract buyers.” Peter added that Cap One was worth no more than $25 in a buyout.

    Yet here we are four quarters later--and Capital One has consistently met or beat the Street’s expectation every quarter! And was the company sold? Not exactly. Instead, the stock, which was trading at $43 a year ago, has since zoomed to $75 recently, before setting back to $65 in the past week or so. A $25 buyout, indeed.

    So what was Peter’s take on Cap One's first-quarter earnings this year? A rerun of 2003! The company, recall, earned $1.84 in the quarter, up from $1.35 a year ago and 21% ahead of Street expectations. Sure enough, just as in 2003 Peter complained he thought the company artificially under-reserved (which it didn’t), skimped on marketing (it didn’t do that, either), and resorted to other tricks to make its number (wrong, wrong, wrong.)

    Peter was proved clueless about the first-quarter 2003 results, and he’ll shortly be shown to be clueless about the 2004 first quarter as well.

    While Peter was complaining about what he saw as under-reserving at Capital One last year, he neglected to tell his readers that earnings in 2002 were understated because of the huge loan loss reserve additions the company was required to make, thanks to the formulaic reserving approach regulators require. No, back then Peter’s view—or rather, in my opinion, the view that David Rocker instructed Peter to have, —was that the big reserve additions were an ominous sign that the company’s credit quality was deteriorating fast. He turned out to be wrong about that, too.

    This isn’t disinterested reporting analysis, it’s a long-term hatchet job, carried out at the expense of readers solely in an attempt to enrich the owner of Peter’s employer.

    There is no level so low that Peter won’t stoop to it. Last week he accused Capital One’s management of violating SEC disclosure rules by announcing internally the company would reduce headcount at certain of its facilities. That is a slander. Peter (naturally) sees the layoffs as the sign of a ruinous expense squeeze. He’s wrong. Capital One is trimming headcount at certain facilities for several reasons, one of which is outsourcing, a long-time Cap One practice. Beyond that, the layoffs reflect the fact that the company has purposely slowed portfolio growth over the past year. Peter, who’s long complained that Cap One’s rapid growth was unsustainable, can’t possibly complain about that. But he does anyway: the plan, he says, “. . . has the air of panic about it. It reads like the company won’t hit its earnings forecast unless it takes a big ax to its expenses.” Please note the absence of any evidence to back up that assertion.

    Mind you, Capital One has never reported full year earnings growth less than 20%, nor has management ever failed to meet or exceed its annual earnings forecast. For ten years! Peter has predicted several times that it would fall short--and has been wrong every time! Who do you think is a better forecaster?

    In his last two pieces on, Peter has lost any semblance of tone of disinterested analyst, and has begun to sound like a man with a vendetta. Why? My guess: David Rocker, who is reportedly short Capital One, is leaning on him hard. Peter is bought and paid for by Rocker, I believe, and has apparently made the choice to serve that one man rather than his RealMoney readers. It’s the worst kind of journalistic betrayal; I’m at a loss to understand why his editors put up with it.

    Peter and I often exchange emails after he writes one of his outrageous columns. They’re not always friendly. It’s clear that, for whatever reason, he is bitter, doesn’t know details of the company, and will not be confused by the facts.

    The irony is that I should be thanking Peter, not lambasting him. To the extent he has any influence with readers left (and heaven help them if he does!) he’s giving us a chance to add to our Capital One holdings at a lower price. "


    OK, stop sugar-coating it, Tom.
  2. Ouch.
  3. I'm surprised Peter didn't attack the COF commercials. Good gawd man, a COF card can turn back knights on horses from attacking ?!?!! Sheer madness!!
  4. COF has appreciated a little more than 20% over the past 5 years (Hasn't done much although there was a huge slide mid 2002 - whats with that?)
    Rocker is not some no name hedge fund, they know their stuff.
    Higher rates spell trouble for lenders and credit card issuers. We'll see how this plays out.
    No way I want to own this.

    no position