Shareholders of Ally Financial (ALLY -1.21%) are hoping that better days are ahead. Since the stock soared 380% between its March 2020 COVID low and its peak price in June 2021, it has once again cratered 58%. And even as the S&P 500 has climbed this year, Ally hasn't participated at all in the rally. Its shares are down 4% in 2023 (as of Oct. 26).

But perhaps this pessimism presents a potential opportunity to buy a beaten-down company. To gain a better understanding, read on to learn three things the smartest investors know about this bank stock. Then you can become more knowledgeable about the business to make a better investing decision. 

Product focus 

Investors are probably familiar with Ally Financial and the fact that it's an online-only financial institution. The business offers a full suite of products and services, like checking and savings accounts, personal loans, investing accounts, and mortgages. 

But the bread-and-butter product category that Ally provides is auto loans. In fact, 45% of its lending assets are represented by consumer auto loans. 

According to Ally's leadership team, there's no indication that demand for cars is weakening due to rising interest rates. In the most recent quarter (Q3 2023, ended Sept. 30), the company reported that a record number of consumers, at 3.7 million, applied for auto loans, with the total origination value being $10.6 billion. 

It's worth mentioning there's a bit of customer concentration here. In the latest quarter, 20% and 22% of auto loans handled by Ally were for Stellantis and GM, respectively. 

Macro impacts 

As is the case with any bank that takes in deposits and lends them out to customers, whatever happens with interest rates has a huge impact on the underlying business and its performance. Like its competitors in the industry, higher interest rates, which have been a direct result of the central bank hiking the federal funds rate to combat inflation, have a two-pronged effect. 

On the one hand, higher rates allow Ally to charge borrowers more. For example, the average yield for the company's retail auto loan book was 8.9% in Q3, up from 7.3% a year ago. 

However, higher rates across the economy mean that borrowers are paying more in interest, and this can lead to a greater chance of default. Ally's annualized net charge-off rate of 1.3% was 54% higher than in Q3 2022. 

Additionally, as Ally starts to pay higher interest rates on its deposit base, the company's net interest margin starts to feel the pinch. The deposit base yielded just under 1.6% in the year-ago period. In the latest quarter, this figure was over 4%. 

Capital returns 

Investors who are thinking about adding Ally stock to their portfolios will be encouraged to see the leadership team's aggressive buyback strategy. Between the start of 2017 and the end of 2022, the share count was reduced by a whopping 30%. Management didn't repurchase any shares in Q3, likely due to the uncertain economic environment. 

Warren Buffett likes businesses that continue shrinking their outstanding share counts. Perhaps this is one reason why Berkshire Hathaway owns nearly 10% of Ally's stock. 

And since initiating its dividend in 2016, Ally has steadily increased the quarterly payout, at least prior to 2022. The current dividend yield stands at 5.1%, which could be extremely attractive for income-seeking investors. 

Armed with more background knowledge about this company, prospective investors should now be better equipped to make an informed decision about Ally Financial.