Capital One (COF) is climbing 3% after Bank of America upgraded the shares to Buy from Neutral. The bank hiked its price target on COF to $235 from $207.

Why the Bank Upgraded COF

Bank of America believes that the synergies from COF's pending acquisition of Discover Financial Services (DFS) will be higher than expected. Moreover, the bank thinks that the combined company's return on equity could be about 15%, potentially enabling its valuation multiples to increase.

A businessman in a suit holding a credit card, standing in front of a wall of electronics.

Among the short-term positive catalysts for COF are rebounding credit trends, the revenue that it will obtain from the acquisition, and expense synergies. Further, the possibility of higher capital returns could also excite investors in the short term, the bank believes. Also importantly, Bank of America asserted that these upbeat catalysts should enable COF's financial results to come in above analysts' average estimates.

Meanwhile, over the longer term, the acquisition should improve COF's ability to recruit small businesses and wealthy consumers, according to Bank of America.

"Given the short- and longer-term catalysts for COF, we think that an above-historical-average multiple is appropriate," Bank of America stated.

The Recent Price Action of COF Stock

In the last month, the shares have risen 3.6%, while they have gained 15% in the last three months.

While we acknowledge the potential of COF, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than COF but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article is originally published at Insider Monkey.