The stock market has stormed back over the past few months to recapture the highs it reached before the COVID-19 crash. In fact, the run-up has been so strong and fast that many stocks, particularly in the technology sector, are now overvalued. That's one reason is why we've seen heightened volatility in recent weeks: Just look at the Cboe Volatility Index, or VIX, which, earlier this week, went back above 30 after hovering in the low 20s throughout August.
But the market remains bifurcated. Stocks in some high-flying sectors are expensive, while those in others are still struggling due to the effects of the pandemic. It is in these beaten-down sectors where investors can find the best values -- that is, companies with solid fundamentals and leadership positions in their industries, but that are temporarily hobbled by the current conditions.
Two stocks that I consider to be ridiculously cheap right now and see as having great long-term growth potential are Ally Financial (ALLY 6.73%) and Citigroup (C 0.26%).
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Ally Financial: Outperforming most banks, at a discount
With about $172.9 billion in assets, Ally Financial is the nation's 16th-largest bank. The former General Motors Acceptance Corp. rebranded itself with its current name in 2010 and went public in 2014; it should come as no surprise that most of its revenue still comes from auto financing.
Like all banks, Ally has been hit hard this year, down 20% through Monday's close. But that's not bad for a bank this year, and when you take a deeper look, you can see that Ally is in much better shape than most of its peers.
For one thing, Ally had revenue growth in the second quarter, up 4% year over year to $1.6 billion, and net income of $241 million. That contrasts with the many banks that had lower revenue and net losses in the quarter. Allyʻs net income was still down from $582 million a year ago this quarter, but it was up from a $319 million net loss in the first quarter.
But the major reason that its earnings were better than those of other banks is that it set aside a fairly low provision for credit losses -- just $287 million, down from $903 million last quarter. CFO Jennifer LaClair said that decision was due to the strong credit quality of its auto loan book. At an analyst conference over the summer, she said that new requests for payment deferrals came "to a screeching halt" after the first quarter, and noted that the majority of those who deferred payments had never been delinquent in the past. On the second-quarter earnings call, she said net charge-offs -- debts unlikely to be repaid -- were down year over year in Q2, and were likely to remain in the expected range for the year.
Car sales are expected to be down about 20% this year, but analysts forecast a 10% increase in 2021. However, it could still be a few years before sales return to pre-pandemic levels. But Ally is in good shape financially, boosting its common equity tier 1 ratio from 9.3% in Q1 to 10.1% in Q2 -- indicating stronger capitalization -- and raising liquidity to $43.5 billion from $30.1 billion on the strength of a record quarter for retail deposits. Ally boosted deposits 17% in the quarter year over year and added 2.1 million new retail deposit customers, bringing its total up by 14%.
Further, Ally has a tangible book value per share of almost $37, which is well above Monday's closing price of $24.41.
That means it is really undervalued in relation to the assets on its books. Ally has made it through the worst of the recession in better shape than most banks, and is a great long-term value right now.
Citigroup: The megabank is a megabargain
Like Ally, Citigroup (C 0.26%) is undervalued, trading at a price-to-book ratio of 0.58. Its book value jumped 5% in the second quarter, which indicates that it is increasing in value relative to its share price.
Donʻt be fooled by the stock price, which is down almost 40% this year. The nationʻs fourth-largest bank, with $2.2 trillion in assets, has been torpedoed by a $5.6 billion provision for credit losses. Still, it managed to generate $1.3 billion in net earnings in the second quarter thanks to 5% year-over-year revenue growth. Among its megabank peers, only JPMorgan Chase had a higher revenue increase. Further, Citigroup reduced expenses by 1% year over year and lowered its efficiency ratio to 52.7%, which is also second only to JPMorgan among the big four. And it raised its common equity tier 1 ratio to 11.5% from 11.2% in the first quarter, well above the 10% regulatory minimum.
Citigroup made news this week when it announced that its president and global consumer banking chief, Jane Fraser, would become its next CEO, replacing Michael Corbat in February. Fraser will be the first woman to lead a major U.S. bank -- and one that's currently trading at a great discount, but positioned to grow as the economy improves.
