You’ve probably heard the saying, “Don’t fight the Fed” (referring to the U.S. Federal Reserve). Well, you might end up fighting the Fed if you hold Ally Financial (NYSE:ALLY) stock. Tight lending conditions definitely don’t favor Ally and the company’s investors.
Don’t get the wrong idea here. Ally isn’t in imminent danger of collapsing like SVB Financial Group (OTCMKTS:SIVBQ) subsidiary Silicon Valley Bank and Signature Bank (OTCMKTS:SBNY) did. Yet, just because Ally Financial will probably survive for a while, doesn’t mean the company will thrive as a business.
It’s not Ally Financial’s fault that U.S. monetary policy in 2023 isn’t as accommodative as it was a couple of years ago. However, Ally’s business model is heavily reliant on one particular market niche, and the Federal Reserve certainly can’t be blamed for that.
Don’t Assume That ALLY Stock Is a Bargain
It may be tempting to go bottom-fishing with ALLY stock at its current share price. Value hunters could point out that Ally Financial has a trailing 12-month price-to-earnings (P/E) ratio of 5.1x, which seems low.
Let’s not allow a low P/E ratio to mislead us, though. It’s not low because Ally has had stellar earnings. As we’ve pointed out before, Ally Financial has shown quarter after quarter of earnings declines.
That’s why we called ALLY stock cheap for a reason. If Ally’s P/E ratio appears to be low, that’s more a function of the sudden share-price decline (primarily due to the banking-sector crisis) than the company’s earnings. Also, Ally Financial’s net income cratered from $3.06 billion in 2021 to $1.714 billion in 2022, and that was before the banking crisis of 2023.
Ally Financial’s Reliance on Auto Loans Is Problematic
It’s not known whether the Federal Reserve will continue to tighten the screws on the U.S. economy with more interest rate hikes. However, it’s not unreasonable to say that the effects of the rate hikes of 2022 and 2023 will linger for a while.
That’s bad news for Ally Financial, which makes money from interest on loans. Businesses and people aren’t as eager to take out loans when the rates on those loans are elevated. The recent banking crisis means that lenders like Ally are likely to tighten their lending conditions. This could also have a negative impact on the company’s ability to generate revenue.
Notably, analyst with Fitch Ratings pointed out that “Ally’s business model that is heavily concentrated in the retail auto segment.” Indeed, Ally Financial’s own earnings presentation confirmed this. At the end of 2022, the company reported $113 billion in the auto category of loans and leases. The company only recorded $33 billion combined for the other categories (Ally Home, Ally Lending, Ally Credit Card and Corporate Finance).
That’s a very heavy reliance on automotive loans. Going forward, it doesn’t bode well for Ally Financial. Restrictive monetary policy is only making it harder to generate revenue from lending money to vehicle buyers. So, Ally’s upcoming quarterly reports may disappoint eager investors.
Don’t Rush to Buy the Dips with ALLY Stock
Ally Financial’s P/E ratio may be deceptive as the company’s earnings track record is far from ideal. Additionally, Ally’s business could suffer for a while due to high interest rates and tight lending conditions.
Ally Financial isn’t necessarily in the same boat as Silicon Valley Bank and Signature Bank. Yet, don’t assume that it’s wise to buy ALLY stock the dip. Now is a time to exercise caution, and to consider monitoring the situation instead of investing in Ally Financial.
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.