With the S&P 500 doubling up from its pandemic lows of last year, many investors are now thinking about another pullback, whether it is a correction (which is a 10% retreat) or even a crash (defined as a 20% lowering). If you have a longer-term perspective, a sudden drop does not have to be a reason for concern. As we have seen throughout the market’s history, prices always come back to reach new highs. And if you do have the money to buy when stocks are low, corrections can give you opportunities to find great value stocks.
And do not forget that you do not have to sit back and wait for a correction to get good values. They are out there today, many of them within the financial sector. And one of these is Ally Financial.
Ally is higher by 50%
You may believe that since Ally Financial, the nationʻs 18th-largest bank, is up around 50% ytd, it’s one of those stocks that might be overvalued and in line for a correction. You may even be nervous that the stock did not lose value in the last year like many other banking companies — it was up around 21% in 2020. But the truth is, Ally is a good value today and has room to run for the foreseeable future.
Ally is a bank that has operations only online. They have a large revenue generator in auto lending (which makes a lot of sense, since it was GM’s financing sector, General Motors Acceptance Corp., before it was branched off back in 2014).
Ally generated record net income and revenue in the second quarter, with huge y/y gains. Ally generated $1.5 billion in net revenue — an increase of 494% y/y — with $1.3 billion of this coming from auto loans. Net interest margin was up by 112 basis points (or 1.12 percentage points) y/y to 3.55%. Also, credit quality improved: The net charge-off rate was around 0.03%, the best year on record, due to a combination of recovering economy and stimulus.
A cheap and good buy
The outlook for auto sales in the second half of this year is good — not quite as good as in the first half, but strong, this is according to Cox Automotive. Beyond this, the outlook is not so clear, although Ally officials say demand might remain high through 2022 and maybe beyond.
“We are continuing to see incredibly strong demand for vehicles. We actually believe some of that could be pushed out due to availability of new and used cars, combined with, we believe the chip shortage will pressure inventory levels,” Ally CFO Jennifer LaClair stated on the Q1 earnings call. That, in turn, could maintain the high demand into 2022.
What makes Ally a great buy is that its price is very low, as it is trading at only 7 times earnings, well under the average number in the sector. It also features a P/E to growth ratio of 0.30, which means its price is not in line with future growth anticipations. Also, its price to tangible value ratio is only over 1.2, another sign of a stock that is a great value.
Author: Scott Dowdy