Value stocks have been on a pretty good run the last two years, outperforming growth stocks. For the one-year period ended Feb. 9, value stocks have returned 17%, while growth stocks have returned 11.4%, as measured by the Russell 1000 Value and Growth indexes, respectively. Year to date, the outperformance has been more pronounced, as the value index is basically flat while the growth index is down 52%.
Of course, the market goes in cycles, and growth stocks have beaten value stocks over the long term, generally speaking. But now remains a particularly good time for value stocks, with the Federal Reserve Board set to raise interest rates in an attempt to slow down inflation and an overheated economy. Thus, some of your best bets right now can be found in the value space -- and one that stands out is Ally Financial (ALLY -0.40%).
Image source: Getty Images.
Auto financing had a big year in 2021
Digital-only banks are fairly common now, but in 2009 when Ally was launched out of the former GMAC Bank, it was among the first entirely digital banks. It sprang from General Motors, so its roots are in auto lending, and that remains its bread and butter and the source of most of its revenue. As of Dec. 31, it had a total of $105.2 billion in auto loans, the most of all lenders in the U.S.
Ally had a record of more than 13,000 auto loan applications in 2021, generating $46.3 billion in auto loan originations -- a 32% increase over the previous year. The company expanded its network of auto dealerships for the 12th straight year and now has relationships with over 21,000 across the country. This led to a 31% increase in auto financing revenue in 2021 compared to the previous year and a massive jump in net income.
In the fourth quarter, pre-tax income was up 5% to $899 million, year over year, while earnings per share were down slightly to $1.79 from $1.82 in Q4 2020, due mainly to higher expenses and provision of credit losses associated with the companyʻs acquisition of digital-first credit card company Fair Square Financial. Considering that car sales slowed considerably in Q4 due to chip shortages and supply chain issues, the numbers are pretty solid.
Also, Allyʻs other businesses saw gains last year, as mortgage originations were up 123% to $10.4 billion in 2021, while Ally Invest, its investing and trading platform, saw assets increase 24% year over year to $17.4 billion. Overall, deposits were up $10.3 billion in 2021 to $134.7 billion.
Ally should be on your radar
Ally is a very efficient company that remains attractively valued. It had an efficiency ratio of 43.7% in 2021, down from 50.3% the previous year. This is in an optimal range, as this is the percentage that the company spends for every dollar of revenue. Also, its return on tangible common equity (ROTCE) was 24.3% in 2021, up from 9.1% in 2020. In Q4, the ROTCE was 22.1%, up from 18.7% in Q4 2020. This is another good measure of its efficiency.
It is ridiculously cheap, given its consistent earnings and favorable outlook. It is currently trading at just over five times earnings and has an extremely low price-to-earnings-to-growth ratio of just 0.30. This measures its current price in relation to its five-year earnings growth expectations. A PEG of 1 means the stock is fairly priced relative to its growth expectations, while anything over 1 means it's overvalued, and anything under 1 means it's undervalued. The lower the ratio, the cheaper it is.
These metrics all signal a stock that is a great value. Ally is in a good position heading into 2022 and beyond as new car sales are expected to tick up, although it could be sluggish through the first two quarters. Also, higher interest rates and a continued shift to digital banking should positively benefit interest income. In addition, the acquisition of Fair Square Financialʻs digital credit card business brings 693,000 cardholders and $816 million in loan balances, along with complementary offerings that can be leveraged within Allyʻs network.
It all adds up to a value stock that is poised to outperform.
