Please ensure Javascript is enabled for purposes of website accessibility

Buy This Undervalued Stock Before Everyone Else Does

By Jennifer Saibil – Jun 10, 2021 at 6:34AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This stock has more than doubled over the past year, but it's still trading at a cheap valuation.

Finding undervalued stocks before Wall Street gives them the credit they deserve is one way to maximize your investment returns. Sooner or later, the secret will get out, and you'll see gains.

Ally Financial (ALLY -4.49%) is a financial stock with several revenue streams that's trading at a serious discount. Here's why it's undervalued, and why it has high potential for growth.

A large product line with many opportunities

Ally is known for its auto lending business, but it operates several other businesses that round out a suite of financial technology solutions.

A bank worker giving a group of clients papers to look through.

Image source: Getty Images.

Its biggest business is auto lending, which has more than 4 million auto loan customers and 2.5 million auto insurance customers.Ally is the largest auto lender in the U.S., with $105 billion in loan commitments as of the end of the first quarter. The company had more than $10 billion in auto loan originations in the first quarter, the highest level in more than five years.That was solid performance during a global car shortage brought on by chip shortages. The lowest car inventory in decades pushed new and used car sales to high levels, and Ally is getting a chunk of that business.

Its other large segment is digital consumer banking, which is also growing at a nice clip. Retail deposits were up 21% in Q1 to nearly $130 billion, which makes it a mid-size bank. Consumer banking customers were up 14% to 2.3 billion. Ally announced last week that is will completely eliminate overdraft fees for all of its accounts, and it is the first major bank to do that. That action shouldn't make a significant mark on its income statement, but it should attract new customers to its current 9 million.

Ally has other smaller divisions that make up the rest of its operations. Home lending is becoming a bigger business for Ally, and home loan originations grew 145% in the first quarter to $1.8 billion.  Current customers accounted for 45% of loan originations, which highlights the company's ability to build a strong organic growth model. Corporate loans reached a record high, also at $1.8 billion.

Brokerage is a smaller player, with close to half a million customers and $14.5 billion in assets. But as it rolls out a more competitive consumer banking model and develops a fintech base for its customers, it can acquire more of its customer base for its brokerage services.

In other words, Ally is growing nicely, and it has further means to keep it up.

Why is it undervalued?

Across many traditional valuation metrics, Ally's stock is trading low. Shares are trading at a little over 9 times forward one-year earnings, which is low even for a bank. Tangible book value (TBV) came in at a little over $36 per share on an adjusted basis in Q1, which means the bank's ratio of price to TBV is an attractive 1.4. 

Like other banks, Ally suffered at the beginning of the pandemic, when it had to move more money to cover potential losses, resulting in a net loss for the 2020 first quarter. But net income has increased in each successive quarter, up to $800 million in the 2021 first quarter, off of $1.9 billion in revenue.

As a smaller player in banking, the market may not be giving Ally the attention (or gains) it deserves. Ally stock gained 132% over the past year as of Wednesday's close and is trading around all-time highs, but it still sports a low overall valuation, with plenty more upside to come.

Ally is an advertising partner of The Ascent, a Motley Fool company. Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Ally Financial Stock Quote
Ally Financial
ALLY
$28.51 (-4.49%) $-1.34

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/27/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.