Is Ally Financial stock worth buying?

For investors (math.) genusAlly Financial (NYSE: ALLY)The company's performance in recent years has been less than stellar. Since April 2019, the company's stock has posted an Aggregate Return of 51%. This performance has lagged significantly behind that of the wider Standard & Poor's 500indicesThis is not an encouraging trend.Here.surname Gion banking stocks(used form a nominal expression)Most of them. from the past six months, as the stock price has risen by 47% during this period.

Encouragingly, investors seem to be warming up to Ally Financial again. Should you follow this trend and buy stocks today?

To help answer this question, I thought it would be valuable to know the main bull and bear arguments about Ally Financial.

Reason to be bullish: Ally's deposits continue to grow.

Ally is America's leadingdigital bankingThis means that it does not have a large physical branch network across the country. In a world where the Internet, technology and data are increasingly important, this distinction can be an advantage. This is especially true when it comes to attracting new deposits.

Ally Savings Products (used form a nominal expression)annual rate of return This is significantly higher than the national average of 4.25%. By not having a bank branch, Ally is able to control the cost of曏 and therefore pay a higher interest rate on their savings.

Why is it so important to keep increasing deposits? These funds are often the cheapest source of capital for a bank entity. Other sources of cash come from funding market debt, usually at much higher interest rates. In addition, deposits are incredibly sticky, demonstrating the high switching costs that banks benefit from.

As a result, this provides Ally with the resources to continue to promote its asset-side noodle business, such as credit cards and other loan products.

As of December 31, the company had $140 billion in retail deposits on its books. This is up 5% from 12 months ago and marks the 14th consecutive year of growth. This is certainly a positive trend.

Bear Market Case: Ally's Overdependence on One Industry

On the other side of the investment spectrum, when it comes to Ally's business model, potential investors can't afford to ignore one important bear case. That's its heavy reliance on the auto industry.

Let's take a look at the history of Ally, which was founded in 2010. Great Recessionafterwards when It's for the spin-off. General Motors (car company)In other words, at the time, the company's sole focus was on underwriting auto loans. In other words, where the company's sole focus was to underwrite auto loans.

This situation is still prevalent today. Auto loans and leases make up almost half of Ally's loan history. More than 40% of auto loans came from General Motors and Stellantis(used form a nominal expression) distributor network, which has also resulted in a concentration of distribution.

Where interest rates are low, the used car market is strong, and borrower demand is high, Ally finds itself in a very favorable position. That's what's happening in 2021, when revenues and earnings are soaring.

The problem is that Ally has zero control over these macro and industry-related variables. In unfavorable times, the company's financials will suffer, as they will in 2023. This cyclicality makes me want to avoid the stock.

Other considerations

For the bold investor who doesn't care about Ally's macroeconomic sensitivities, the company's 3.1%'s dividend yield It's a meaningful source of revenue. The quarterly dividend per share increased from $0.08 at the end of 2016 to $0.30 in January of this year, which is a solid record of growth. Koon has done a good job of actively buying back shares.

But Ally's valuation isn't as compelling as it was a few months ago. The stock's P/E ratio of 12.8 is about 30% higher than its average P/E ratio over the past 10 years, which to me is another compelling bear market argument that I think carries more weight than bullish cash. As a result, I continue to avoid buying stocks.

Should you invest $1,000 in Ally Financial now?

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Ally is an advertising partner of The Ascent, a Motley Fool company. Neil Patel and his clients do not own any of the stocks mentioned above.The Motley Fool recommends General Motors and Stellantis, and the following options: General Motors January 2025 $25 Call Options Long.The Motley Fool has a disclosure policy.

Is Ally Financial Stock Worth Buying? This post was originally published by The Motley Fool.