Value stocks have done quite well over the past two years, outperforming growth stocks. For the one-year period ending February 9, value stocks generated a return of 17%, while growth stocks generated a return of 11.4%, as measured by the Russell 1000 Value and Growth index, respectively. Year-to-date, the outperformance has been more pronounced, as the value index is virtually flat while the growth index is down 52%.
Of course, the market is cyclical, and growth stocks have outperformed value stocks over the long term, in general. But now remains a particularly good time for value stocks, with the Federal Reserve poised to raise interest rates in an attempt to curb inflation and an overheated economy. So some of your best bets right now can be found in the value space – and the one that stands out is Allied Financial (NYSE: ALLY).
Auto finance had a great year in 2021
Digital-only banks are now quite common, but in 2009, when Ally was launched from the former GMAC bank, it was among the first all-digital banks. He came out of General Engines, so its roots are in car lending, and that remains its bread and butter and the source of most of its income. As of December 31, it had a total of $105.2 billion in auto loans, the largest of any lender in the United States.
Ally had a record 13,000+ auto loan applications in 2021, generating $46.3 billion in auto loans, a 32% increase over the previous year. The company expanded its auto dealership network for the 12th consecutive year and now maintains relationships with more than 21,000 dealerships nationwide. This resulted in a 31% increase in auto finance revenue in 2021 over the prior year and a massive increase in net profit.
In the fourth quarter, pretax profit increased 5% to $899 million, year over year, while earnings per share fell slightly to $1.79 from $1.82 in Q4 2020, primarily due to higher expenses and provision for credit losses associated with the company. acquisition of the first digital credit card company Fair Square Financial. Considering car sales slowed significantly in the fourth quarter due to chip shortages and supply chain issues, the numbers are pretty solid.
Additionally, Ally’s other businesses saw gains last year, with mortgages growing 123% to $10.4 billion in 2021, while Ally Invest, its investment and trading, saw its assets grow 24% year-over-year to $17.4 billion. Overall deposits increased by $10.3 billion in 2021 to $134.7 billion.
Ally should be on your radar
Ally is a very efficient company that retains an attractive value. It had an efficiency ratio of 43.7% in 2021, down from 50.3% the year before. This is an optimal range because it is the percentage the business spends for every dollar of revenue. Additionally, its return on tangible equity (ROTCE) was 24.3% in 2021, compared to 9.1% in 2020. In the fourth quarter, ROTCE was 22.1%, compared to 18.7% in the fourth quarter. 2020. This is another good measure of its effectiveness.
It is ridiculously cheap considering its consistent profits and favorable outlook. It is currently trading at just over five times earnings and has an extremely low price/earnings/growth ratio of just 0.30. This measures its current price against its five-year earnings growth expectations. A PEG of 1 means the stock price is fair relative to its growth expectations, while anything above 1 means it is overvalued and anything below 1 means it is undervalued. The lower the ratio, the cheaper it is.
These metrics all signal a stock that is of great value. Ally is well positioned for 2022 and beyond as new car sales are expected to increase, although they may be sluggish in the first two quarters. Additionally, higher interest rates and a continued transition to digital banking should positively benefit interest income. Additionally, the acquisition of Fair Square Financial’s digital credit card business brings 693,000 cardholders and $816 million in loan balances, along with complementary offerings that can be leveraged within the Ally network.
It all adds up to a value stock that is poised to outperform.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a high-end consulting service Motley Fool. We are heterogeneous! Challenging an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and wealthier.