By John Spence

BOSTON (Dow Jones) -- An analyst upgrade of credit-card stocks Capital One Financial Corp. and Discover Financial Services helped lift the shares on Tuesday as the broader financial sector bounced off the mat.

Stifel Nicolaus analyst Chris Brendler in a research note Tuesday said that even though the companies will feel the pain of a severe recession, they should be able to weather the storm. Brendler also pointed to compelling valuations -- the stocks are trading near fresh lows in the wake of another disappointing jobs report. Last week, the Labor Department reported the U.S. economy lost 651,000 jobs in February as the unemployment rate jumped to more than 8%.

Despite Tuesday's rally, shares of Capital One (COF) are down more than 70% so far this year, while Discover (DFS) and American Express Co. (AXP) are off more than 35% each for the period.

Stifel upgraded Discover and Capital One to buy from hold and kept its hold rating on American Express. However, the 2009 profit estimates for all three companies were reduced to reflect higher loss and delinquency outlooks. The forecasts also assume unemployment peaks at 10.5% in March 2010.

The stocks' valuations "imply that there is a significant probability these companies won't survive the deepening recession in their current form," Brendler wrote. There are many concerns swirling around the companies. They may need to raise capital to cover mounting losses and new accounting rules for securitizations.

On Monday, Capital One said it was cutting its dividend by 87% to conserve capital.

Other fears include liquidity with credit markets frozen, and political risks such as so-called cramdown legislation and new card rules, the analyst said.

"We have done a deep dive on all of these issues and have concluded that while the risks are certainly unprecedented, they are overly discounted in the current valuations," Brender noted.

"We recognize this may be [and in all likelihood will be] too early," the analyst wrote, adding that Capital One and Discover are trading below 50% of tangible book value. "But we also can't ignore the compelling valuations given our near-term catalysts."

The catalysts include seasonality as tax refunds start to come in, government aid and improved visibility on political risks, according to Stifel.