With the S&P 500 recently doubling from its pandemic lows last year, many investors are wondering if we're due for another pullback, whether it's a correction (defined as a 10% retreat) or even a crash (defined as a 20% drop). If you have a long-term perspective, a sudden drop doesn't have to be a cause for concern. As we've seen throughout history, the market always recovers to set a new high. And if you have the resources to buy when stocks are down, corrections provide investors with opportunities to find great stocks at good values.
And don't forget that you don't have to wait for a correction to find good values. They're out there today, many of them in the financial sector. One of them is Ally Financial (ALLY 1.89%).
Ally is up over 50% this year
You might think that because Ally Financial, the nationʻs 18th-largest bank, is up roughly 50% year to date, it's one of those stocks that may be overvalued and due for a correction. You might even be nervous that the stock didn't lose value last year like most of its banking peers -- it was up about 21% in 2020. The fact is, Ally remains a good value right now and has some room to run over the foreseeable future.
Ally is an online bank whose largest revenue generator is auto lending (which makes sense, since it was known as General Motors' financing arm, General Motors Acceptance Corp., before it was spun off in 2014).
Ally generated record revenue and net income in the second quarter, with huge year-over-year gains. Ally generated $1.5 billion in net financing revenue -- an increase of 494% year over year -- with $1.3 billion of that coming from net auto financing. Net interest margin was up 112 basis points (or 1.12 percentage points) year over year to 3.55%. In addition, credit quality improved: The net charge-off rate was 0.03%, the best on record, due to a combination of stimulus and a recovering economy.
Also, consumer auto originations jumped to $12.9 billion in the second quarter -- the highest level in 15 years. About $7.3 billion, or 56%, of that came from used retail volume, while $3.8 billion came from new retail volume, and $1.8 billion came from leases. It all stems from a red-hot auto sales market, as pent-up demand for new and used vehicles has boosted sales, and lower inventory brought on by a chip shortage has resulted in rising prices.
A good buy at this valuation
The outlook for new and used auto sales in the second half is good -- not quite as robust as in the first half, but strong nonetheless, according to Cox Automotive. Beyond that, the outlook is less clear, although Ally officials say demand could remain high through 2022 and perhaps beyond.
"We're continuing to see incredibly strong demand for personal vehicle ownership. We actually think some of that could be pushed out simply because of availability of new and used vehicles, coupled with, on the supply side, we think the chip shortage is going to continue to pressure inventory levels," Ally CFO Jennifer LaClair said on the second-quarter earnings call. That, in turn, could keep demand high into 2022.
Normalization is not a bad thing for Ally, as the leading provider of auto loans in the U.S. has been a very consistent performer over the years, with low overhead and high efficiency. It has an extremely low adjusted efficiency ratio of 44.5%, down from 52.5% a year ago (this key bank metric measures operating expenses as a percentage of revenue, so lower is better).
What makes it a great buy is that its valuation remains very low, as it is trading at just 7 times earnings, well below the average range in the sector. It also has a price-to-earnings-to-growth (PEG) ratio around 0.30, which means the price is not aligned with future growth expectations. Also, its ratio of price to tangible book value is just over 1.2, another sign of a stock that's a good value (tangible book value is basically equity minus intangible assets, like goodwill).
You don't have to wait for another correction to buy up this good stock -- it's already cheap.