However, after plunging on the heels of many bank collapses, ALLY stock has found support.
Growing speculation that legendary investor Warren Buffett’s firm, Berkshire Hathaway (NYSE:BRK.A, NYSE:BRK.B), already a large Ally Financial shareholder, will make a takeover offer for this digital-first bank.
But before you decide to buy based upon these Buffett rumors, there are few things to keep in mind. For one, buying a stock on takeover rumors alone rarely works out well. Not only that, it is highly questionable whether Berkshire wants to buy a bank outright.
To top things off, one of the key reasons Berkshire isn’t interested in a takeover is a powerful reason you should stay away from this stock.
ALLY Stock and Recent Takeover Rumors
As InvestorPlace’s Samuel O’Brient reported March 21, it was a research note from Gordon Haskett Research Advisors that has led to many investors diving into Ally Financial, on speculation that the financial institution is “in play.”
Per Gordon Haskett, reported talks between Warren Buffett and the Biden Administration regarding the banking crisis point to an increased chance of making a big banking investment. In the research firm’s view, this could mean an outright acquisition of a bank, with Ally being the most likely target.
Gordon Haskett’s prognostication notwithstanding, I wouldn’t assume that this takeover talk regarding ALLY stock will move beyond the rumor mill.
For starters, if Berkshire were to make a bank a wholly owned subsidiary, it would likely become subject to bank holding company regulations. Buffett has previously stated that his firm does not want to become a bank holding company.
Of course, this doesn’t rule out the possibility of Berkshire increasing its ALLY position. Buffett’s holding company could buy additional shares in the public market, or even make a large preferred stock investment, similar to the deals it entered during the late-2000s Great Financial Crisis. Still, there’s one key risk to consider.
A Likely Deal Breaker for Buffett
Speaking of the Great Financial Crisis, the corporate history of Ally Financial intertwines with this major event in American banking history. For the first ninety years of its existence, Ally was GMAC, and was the financial services arm of General Motors (NYSE:GM).
Following the Great Financial Crisis and the Great Recession, Uncle Sam bailed out GMAC. After being split off from GM, it re-branded as Ally Financial. Yet while the firm has become more like a mainstream bank in the past fourteen years, as credit ratings firm Fitch recently noted, Ally’s business model remains “heavily concentrated in the retail auto segment.”
As many have pointed out, high auto loan exposure is something that could prevent Warren Buffett from increasing Berkshire’s ALLY stock position. Although investors have already bid down ALLY because of rising auto-loan losses, additional downside may remain and more signs point to an auto loan crisis in the future.
In the more immediate term, Ally’s high exposure to the situation with Carvana (NYSE:CVNA) is a major risk. Already a funding for the online used car retailer, earlier this year this bank agreed to buy up to $4 billion in additional Carvana-originated auto loans.
Not only is the aforementioned heavy auto loan crisis risk something that will probably keep Buffett from investing more into Ally (unless the terms are favorable to Berkshire, unfavorable to outside investors).
This factor should keep you away as well. Even without the “Buffett factor” in mind, I’ll admit that Ally may look like a worthwhile value play on a stock screener, but it trades for less than 5 times earnings and at a 30% discount to book value.
However, this low valuation could be fleeting. Growing auto loan losses could impact Ally’s profitability and balance sheet, turning what seems like a deep value play into little more than a “value trap.”
Following the bank sector sell-off, there may be some worthwhile bargains out there, but ALLY stock isn’t one of them. Tune out the takeover talk, and steer clear.
ALLY stock earns a D rating in Portfolio Grader.
On the date of publication, neither Louis Navellier nor the InvestorPlace Research Staff member primarily responsible for this article held (either directly or indirectly) any positions in the securities mentioned in this article.