Capital One Financial (COF -0.43%) is a large U.S. bank, but one that has a slightly different focus than many of its peers. That's both good and bad, depending on how you look at it and depending on the state of the economy. Here's why some investors might want to avoid Capital One while others might find it even more attractive now that it has completed the acquisition of Discover.

What does Capital One Financial do?

From a big-picture perspective, Capital One is a bank and does a lot of normal bank things, like offering bank accounts and checking accounts. However, Capital One is unique in its focus on offering credit to lower-credit-quality customers. That includes both credit cards and, to a lesser degree, car loans.

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Lending to lower-credit-quality customers can be very profitable. These customers often lack access to other alternatives and, thus, Capital One can charge them more for the products it offers. In addition, these customers tend to carry a balance more often than customers with higher credit quality, which results in Capital One having a greater opportunity to earn interest income.

The addition of Discover, meanwhile, extends Capital One's business. Before, it simply offered cards from other transaction processors, notably Visa and Mastercard. Now it can offer its own cards, which allows it to collect the processing fees every time a customer uses a Discover card. Those fees, while small on a per transaction basis, add up to very large numbers. And the fees tend to be fairly reliable even during economic downturns, like recessions.

Capital One is better positioned today

All in, adding Discover to Capital One's banking business has likely made the company more attractive. It should provide a reliable foundation for the more volatile credit and car loan businesses the company operates. That said, in the first quarter of 2025 the company's allowance for credit losses was reduced, hinting that the company's customers are doing fairly well right now. It would seem like Capital One is hitting on all cylinders today.

The problem here is that, even after the Discover purchase, Capital One's business still leans heavily on lower-credit-quality customers. When times are good, focusing on these customers can seem like a huge win, until it isn't anymore. These are the customers that tend to have the biggest problems paying their bills when economic conditions weaken.

Buying a stock when everything is going well only makes sense if you are getting a good price, which doesn't appear to be the case right now. Notably, Capital One's price-to-sales, price-to-earnings, and price-to-book value ratios are all above their five-year averages. The dividend yield is 1.1%, which is at the low end of the yield range over the past decade. In other words, you are paying a premium price for Capital One stock during the good times.

Look out when the bad times come

Capital One has deftly managed through past recessions, and it will likely do so again. However, as famed value investor Benjamin Graham has said, even a good company can be a bad investment if you pay too much for it. Most investors will probably be happier if they put Capital One on their wish list and buy when the business is muddling through a recession. That's true even though it appears to have improved its business model with the acquisition of Discover.