When it comes to investment success, Berkshire Hathaway (BRK.A 1.75%) (BRK.B 1.85%) CEO Warren Buffett is alone in his class. The so-called “Oracle of Omaha” has dominated the company for over 50 years and has an unparalleled track record. Since he took the helm of the conglomerate in 1965, the company’s stock has risen more than 20% each year, giving him a staggering 3,641,613% in total.
When markets fall and uncertainty prevails, many investors look to Buffett’s success and take inspiration from his holdings. One of his stocks that seems particularly interesting at the moment is Ally Financial (ally 3.82%)The bear market sent stocks crashing, dropping 55% from their highs. However, there is a clear distinction between a stock price drop and a company in crisis.
Can Ally Financial bounce back from the blow it did to its stock in 2022? Let’s take a step back and see what the bigger picture reveals.
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next generation banking
Unlike traditional brick-and-mortar banks, Ally focuses on digital financial services. Indeed, we offer all standard banking services such as high-yield checking and savings accounts, certificates of deposit, personal loans, auto loans, and home loans. The company also boasts an investment services platform, POS loans, corporate lending, and even auto dealer financial services.
However, without online access and traditional branches, the company offers more competitive rates than traditional banks that incur real estate and high costs.
Additionally, Ally Financial’s focus on customer service has served the company well, garnering an 85% customer satisfaction rating from 10.8 million customers and $189 billion in total assets (I’m happy too!). customer).
Headwinds due to short-term strong winds…
The deteriorating economic climate has created a perfect storm for some stocks, and Ally Financial was not defenseless. With that in mind, let’s talk about the 800-pound gorilla in the room. The company’s third-quarter financial results help explain the near-term headwinds Ally Financial is facing.
First, the environment rapid Rising interest rates have weighed on earnings, narrowing the gap between the interest banks pay depositors and loans they make. In the third quarter, Ally’s net interest margin (NIM) of her 3.81% was down 0.23% from his. Moreover, with interest rates expected to rise in the near term, Ally’s view could be even worse. Management expects NIM to hit 3.5% of her.
This situation isn’t ideal, but it’s a reality many banks face today, so it’s not unique to Ally. However, there are bright spots in this cloud. Over time, banks can widen spreads, ultimately leading to improved profitability.
The second headwind Ally faces relates to its important auto-lending business. During periods of economic uncertainty, high inflation, and rising interest rates, people are much less likely to buy new cars, or new cars.
Moreover, as the situation worsens, defaults will always increase as people become unable to pay off their car loans. Ally raised her loan loss reserves to her $438 million, an increase of $362 million for that eventuality. At the same time, her delinquency rate of 30 days or more past due rose to 2.93%, up from her 1.83% in the same period last year.
Given the aforementioned challenges, investors may be tempted to avoid Ally Financial. Let’s see why Buffett didn’t.
… long-term equal opportunity
Even in the face of economic headwinds, Ally Financial continued to grow its earnings, albeit at a rather tepid pace, up 2% year-over-year in the third quarter.
There are many negative factors baked into the current stock price as a result of the current situation. This is a great situation for investors looking to buy stocks at discounted prices. As measured using various financial metrics, Ally Financial’s valuation is currently ridiculously low.
Buffett’s affinity for bank stocks is well-known. really like to buy good stocks at low prices. Allies check those boxes. The stock is currently trading at less than 75% of his book value. For context, bank of america (back 1.00%)Berkshire’s largest bank holding, , is trading at 1.14 times its book value, showing just how cheap Ally Financial is. What’s more, Ally’s stock is selling at a near record low of four times his earnings.
This helps explain why Berkshire bought shares in the first quarter and then tripled its position in the second quarter. The stock now stands at his 30 million shares worth over $757 million.
Finally, Buffett loves dividends and Allie has a short but growing track record. Ally has increased its dividend by 275% since it began paying out in mid-2016. Her current yield of 4.9% has risen due to the falling stock price, but it could rise further from here, as Ally has only used his 24% of his earnings to pay out. Additionally, the company has been repurchasing its shares, reducing its share count by 38% over the past six years.
Ally Financial is one of Warren Buffett’s stocks that could skyrocket, given its business diversity, profitability-boosting opportunities, and bargain prices.
