Warren Buffett is known for his value style of investing, and the safe stocks that he tends to pick have helped him beat the market over the past few decades. You don't need to look any further than the current market to see how safe stocks can power your portfolio under challenging circumstances, and Warren Buffett sees the same market.
Conditions over the past few months compelled his holding company, Berkshire Hathaway (BRK.A +0.10%)(BRK.B +0.15%), to invest in eight new positions, including Ally Financial (ALLY +1.61%). If you take a look at Ally, you'll probably agree that its stock looks like a screaming buy this month.
Old business, new focus
Ally Financial has been around since 1919, and its core business is auto loans and insurance. But it has thrived in its new form as a digital bank with an investment arm, corporate finance segment, and mortgage category.
The auto business was strong in the first quarter, with more than $11 billion in originations, the highest first-quarter number in 11 years. Although auto is its oldest business, Ally is investing in its digital channels and data analytics to improve its product. Demand is still strong in the automotive market, exacerbated by supply chain disruptions. The resulting low inventory levels are disrupting Ally's auto business despite its overall strength, and that should lead to even higher growth in the long term.
NYSE: ALLY
Key Data Points
Ally's digital bank was introduced in 2016, and it has grown to 2.5 million customers as of the end of the first quarter, an 8% increase over last year's number. Bank deposits increased $3 billion over last year to $142.5 billion. Ally's bank is completely online, and without branches and their associated costs, the bank segment is highly profitable. Retail deposits account for almost 90% of the bank's funding, allowing the company to operate its other businesses, such as mortgages, profitably.
Mortgages remained strong in the first quarter, with $1.7 billion in originations, despite the headwinds of higher interest rates, although they were lower year over year. In the investment business, customer assets increased 10% over last year. Credit card customers increased 73% year over year. So while Ally is sure to be affected by economic trends this year, it's running an efficient business and offering popular and profitable financial products with innovative solutions that customers are embracing.
As far as how it's doing in comparison to other banks, Ally boasts a return on equity of more than 20%, which was higher than most big banks in the first quarter. Compare it to JPMorgan Chase, Bank of America, Goldman Sachs, and Wells Fargo.
ALLY Return on Equity data by YCharts.
Ally raised its dividend by nearly 60% in the second quarter, and at the current price, it yields 3.6%.
Positioned for future success
The past year's conditions included increased wages and higher savings on average for Americans, and 2022 isn't expected to show the same growth. With rising interest rates, people typically borrow less money, including originating fewer mortgages. Banks as a group go through cycles that are strongly tied to macroeconomic conditions and specifically to interest rate trends. However, they also have a lot of cash and are strongly resilient even during pressured periods.
What makes Ally look like a compelling buy specifically now is its valuation. Ally stock is trading at less than one times tangible book value, which implies that shares are trading at less than the value of the company's assets minus liabilities. Shares also trade at only four times trailing-12-month earnings, which is dirt cheap even for a bank stock, which typically trades at lower price-to-earnings ratios. Compare it to the same banks we looked at above.
ALLY PE Ratio data by YCharts.
Considering the bank's past performance, future opportunity, efficient management, and low valuation, Ally looks like a screaming buy.
