It is hard to find cheap stocks trading at all-time highs, but Warren Buffett's portfolio at Berkshire Hathaway may be a good place to start. Berkshire Hathaway owns a large collection of stocks, and one that should catch people's eye today is Ally Financial (ALLY +2.56%). Berkshire owns close to 10% of the online bank and is its largest shareholder, having started a position back in 2022.
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Many investors have soured on Ally stock in the last few years. The stock is off 37% from all-time highs while the rest of the market is soaring. But if you look at the numbers, now may be the time that Ally Financial begins to turn around its operations, meaning the stock could go parabolic in 2025 and beyond for those who buy today. Here's why this Warren Buffett stock may go parabolic for the rest of this year.
Improving loan metrics, decreasing deposit costs
As an online bank, Ally Financial has two sides of the business that investors need to analyze: loans and deposits. The company makes loans in a variety of markets, but mostly for consumer automotive loans, which have been under some pressure in the last few years because of rising interest rates. Loans made in 2022 and 2023 have not performed as well as Ally hoped, while existing loans at ultra-low yields decreased its interest income, while costs paid to depositors soared.
NYSE: ALLY
Key Data Points
These dynamics decreased Ally's net interest margin (NIM), which is a large indicator of what the company can generate in bottom-line profits for shareholders.
Now, all three of these factors seem to be normalizing. Deposit costs are decreasing due to the Federal Reserve lowering interest rates and Ally giving up on expensive depositors to competitors. Its 2024 automotive loan book is performing much better than 2022 and 2023 when it comes to delinquencies and 30 days past due metrics. The average yield it is earning on its automotive loan book keeps rising, which will help expand NIM through the rest of 2025.
Add it up, and Ally has a lot working in its favor coming out of the inflation-induced Federal Reserve hiking cycle. The stock is not earning much in net income today, but it has a recipe for greatly increasing its earnings in the next few quarters: lower funding costs, higher-yielding loans, and better-performing loans. Expect this dynamic to continue.
A cheap stock for those with eyes forward
Ally stock does not look cheap on a trailing basis. It has a price-to-earnings ratio (P/E) of 26, which is expensive for a bank. However, at a market capitalization of $10.9 billion, the stock may be a steal if we consider Ally's forward earnings potential.
Before the pandemic, Ally was well on its way to generating $2 billion in annual net income. It went through a period of overearning with interest rates close to zero and rising used car prices and has now fallen to the other side of the spectrum.
Through the rest of 2025 and over the next few years, Ally's core automotive lending business can help it recover back on its track to $2 billion in net income, which is easily doable with a much larger deposit/asset base today compared to before the pandemic.
This would bring the stock's price-to-earnings ratio (P/E) down to around 5, a dirt-cheap figure even for a bank. This is the setup that could drive gains for Ally stock through the rest of 2025.
ALLY PE Ratio data by YCharts
Long-term dividend growth at a high starting yield
Another way to look at Ally's cheapness is the stock's dividend. A rising dividend will not make the stock price go parabolic, but it can help fuel total shareholder returns. Today, Ally has a dividend yield of 3.40%, a high starting yield even though its dividend has not been raised in a few years. Once Ally's net income starts moving in the right direction again, the company should be able to start raising its dividend per share, which will help boost returns for shareholders who buy today. This makes it a perfect dividend growth stock.
Lastly, once Ally's net income begins to grow again, its share repurchase program will likely recommence. This has been paused for a few years as the bank works out the kinks on its balance sheet but it was previously a huge driver of shareholder returns. Shares outstanding will begin to shrink, which will help the company increase its dividend per share at an even faster rate.
Putting everything together, Ally Financial looks like a dirt-cheap Buffett stock with the chance to produce huge returns for investors who buy today.
