Staff Reporter
A promising opportunity for investors is emerging as a company begins its turnaround.
Finding affordable stocks at all-time highs can be challenging, but Warren Buffett’s Berkshire Hathaway portfolio may offer some insights.
Among its diverse holdings, Ally Financial (ALLY) stands out. Berkshire Hathaway owns nearly 10% of this online bank, making it its largest shareholder since establishing a position in 2022.
In recent years, many investors have turned away from Ally’s stock, which has dropped 37% from its all-time highs, even as the broader market has surged.
However, current financial indicators suggest that Ally Financial may be on the verge of a turnaround, potentially leading to significant gains in 2025 and beyond for those who invest now. Here’s why this Buffett-backed stock could perform exceptionally well for the remainder of the year.
Improving Loan Metrics and Lowering Deposit Costs
As an online bank, Ally Financial operates in two main areas: loans and deposits. The company primarily focuses on consumer automotive loans, which have faced challenges due to rising interest rates in recent years.
Loans issued in 2022 and 2023 have not met expectations, leading to decreased interest income, while costs paid to depositors have surged.
These factors have negatively impacted Ally’s net interest margin (NIM), a key measure of profitability for shareholders. However, signs indicate that these trends are beginning to stabilize.
Deposit costs are declining, aided by the Federal Reserve’s rate cuts and Ally’s decision to move away from high-cost depositors. Furthermore, Ally’s 2024 automotive loan portfolio is showing improved performance in terms of delinquencies and overdue payments. Increasing yields on these loans will further enhance NIM through 2025.
In summary, Ally is well-positioned to benefit from the easing of inflationary pressures and the Federal Reserve’s rate hikes. Although the bank is not currently generating substantial net income, it has the potential for significant earnings growth in the upcoming quarters, driven by lower funding costs, higher yields, and better loan performance.
A Bargain for Forward-Thinking Investors
While Ally stock may not appear cheap based on trailing metrics—with a price-to-earnings (P/E) ratio of 26, which is high for a bank—it could be undervalued given its future earnings potential. With a market capitalization of $10.9 billion, the stock could be a bargain if we consider Ally’s path back to generating around $2 billion in annual net income, similar to pre-pandemic levels.
With a larger deposit and asset base than before the pandemic, Ally’s core automotive lending business could facilitate this recovery, potentially lowering its P/E ratio to around 5—a strikingly low figure for the banking industry. This setup may drive significant gains for Ally stock through the remainder of 2025.
Long-Term Dividend Growth and High Starting Yield
Another aspect of Ally’s appeal is its dividend. While a rising dividend may not directly cause the stock price to soar, it can enhance total shareholder returns. Currently, Ally offers a dividend yield of 3.40%, which is attractive despite having not raised its dividend in recent years. As net income improves, the company is likely to resume dividend increases, benefiting investors who buy now.
Additionally, once Ally’s profitability rebounds, its share repurchase program may restart. This program, which has been on hold while the bank stabilizes its balance sheet, was previously a significant contributor to shareholder returns. Reducing the number of outstanding shares will further accelerate dividend growth.
In conclusion, Ally Financial presents an attractive investment opportunity as a low-cost Buffett stock that could yield substantial returns for those who invest today.
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