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ally financial stock

Why This Ignored Stock Is Massively Undervalued

financials Nov 02, 2021

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The last decade of stock investing was dominated by high growth tech companies that were fueled by low interest rates. But over the last year something has finally changed that has set up a positive outlook for the future of other sectors that were lagging far behind.

And that is the Federal Reserve and their interest rate policy. 

No, this post will not bore you on interest rate policy details as that is a recipe for closing your computer and throwing out the window.

The high level though of what you need to know is that the Fed's policies drastically affect the stock market. In general:

  • Low interest rates = Good news for high growth sectors such as tech.
  • High interest rates = Good news for financials, energy and other cyclical sectors.

And right now, the Fed is set to raise rates twice in 2022/2023!

This fact alone has spurred a massive rally in the financial sector and is the entire basis of today's analysis. 

But which company in the financial sector is one of the best to invest in?

Let's get into it it below and discuss what their price target is!

 

Ally Financial:

The financial sector is up big over the last 12 months with 1 year returns at 66%. And Ally is currently outpacing that return over the last year with the stock up 77% during that same time period! However over the last 6 months, the stock is down 5% while financials are up close to 10%.

So while many would think to be hesitant with such a change over the last 6 months, we actually see this as a massive buying opportunity as we believe the stock is underpriced!

Add in the fact that the market did not appreciate their recent earnings report and we see some serious upside for the company over the next year! 

So what is making us think this? The biggest ticket items fall within two categories: Sector Review and Stock Review. 

 

Sector Review:

  • Recovering fundamentals & cheap valuations in conjunction with interest rate policy boost the outlook for financial stocks. While this doesn't help Ally specifically, these three factors massively help all of the financials sector. Even with the sector doing so well over the last year, financials should be in a position to do well for the next few years.
  • While the market is anticipating a rate hike, unusually high valuations in the tech & utilities sector, lead us to believe the market is discounting this possibility. While anything is possible in the next 12 months, what we've seen historically is that rates often rise after stocks in these sectors hit their peak valuations. If this happens on schedule or even gets accelerated, financials will benefit greatly. Looking closer at the tech sector we see that their P/E ratio's are some of the highest of all time. This usually indicates an upcoming headwind for high growth tech stocks.

While this is very positive news for the financials sector, none of it speaks to Ally specifically. When narrowing in on Ally, we see their recent acquisition of Fair Square as a prime factor to start getting involved today. Let's dive into those reasons:

 

Stock Review:

  • Ally's acquisition of Fair Square. Earlier this year when Ally was looking to acquire Cardworks there was a lot of skepticism due to the credit risk of Cardworks' books, but fast forward to this acquisition and it looks like Ally can enter into the credit card market with half the risk, double the technology and at a cheaper price - making this acquisition an absolute home run. Tying this together with their 2.5M customers and Ally's jump into credit looks to stem from a strong starting point - giving them a new sustainable revenue line going forward.
  • Revenue Growth, Synergies & Diversification: By jumping into consumer credit, Ally is taking a hard stance in diversifying their revenue stream. Today a large part of their revenue comes from auto lending, but by combining consumer credit and banking with auto, they'll be able to maximize their LTV per customer. If you're unfamiliar with this term, LTV stands for Life Time Value and is the amount of "value", on average, you can expect to receive from a given consumer. While the two main levers for growth are LTV and new customers, by increasing LTV, Ally will become more efficient at cross-selling their capabilities! With auto approaching a peak, this is a perfect time for Ally to make this jump. While they will not ignore new customer growth, this is an easier way for Ally to increase revenues without even bringing on new customers.

 

How To Play It:

The crazy part of all of this, is that the market is completely discounting this set up for Ally. As we mentioned above, Ally is down 5% in the last 6 months and we believe there is some serious upside coming for them. 

While we are not sure when this catalyst event will happen, any positive news in the form of an enhanced outlook from their team or outlook from the Fed will likely reverse the course of the current trajectory.

This is a stock that could take a bit to play out but you need to be patient as it'll eventually grind much higher! This is a can't miss if you're trying to get involved in the financials sector.

 


 

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