There's little question that Berkshire Hathaway CEO Warren Buffett is on the short list of the most successful investors ever. In over five decades at the helm of the company, the legendary investor has shown his staying power. During his 58-year tenure, the so-called "Oracle of Omaha" has helped Berkshire Hathaway stock climb nearly 20% annually and, in all, has soared a mind-boggling 3,787,464%. Given the results, investors could do worse than following his example.
One Berkshire Hathaway holding that looks particularly appealing right now is Ally Financial (ALLY -0.29%). The uncertain economic environment has weighed on auto loans, which comprise a large part of the bank's business. As a result, the stock is still down nearly 50% from its peak and is currently selling for less than $30 per share. Berkshire Hathaway continues to hold nearly 10% of Ally's outstanding stock. Let's look at what investors may be missing that makes this a no-brainer stock to buy with $100 right now.
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The bank of the future
Part of the appeal of Ally is that it doesn't operate like traditional banks. The company focuses on online access to its digital financial services, though its offerings are comparable with those of its brick-and-mortar rivals. This includes checking and savings accounts, certificates of deposit (CDs), personal loans, mortgages, and auto loans. Ally also provides a wide range of investment services, business financing, and point-of-sale loans, as well as loan services for auto dealers.
The lack of traditional branches gives Ally a significant competitive advantage. Without the associated expenses, the company can offer much higher interest rates than conventional banks. Plus, Ally's long history of online services and focus on customer service has attracted a loyal following. The company has an 87% customer satisfaction rating and a 96% retention rate (I'm also a longtime satisfied customer). This has helped Ally grow a base of more than $159 billion in total assets and retail deposits of $139 billion.
The attraction for Berkshire Hathaway
Several factors likely attracted Buffett's Berkshire Hathaway to Ally Financial. His long affinity for bank stocks is well established, but Buffett also likes a good bargain -- and Ally certainly fits the bill, trading for 84% of its tangible book value, which is remarkably cheap for a bank. For context, Bank of America -- Berkshire Hathaway's largest bank holding -- trades for 1.22 times book value, which helps illustrate just how cheap Ally is by comparison.
Buffett also loves a good dividend, and Ally shines there as well. Since the company initiated its dividend seven years ago, its payout has increased by 275% and currently yields 4.15% (as of this writing), outpacing Bank of America's 3.15%.
These factors may have influenced Berkshire Hathaway's decision to hold a sizable stake in Ally, amounting to 29 million shares -- or roughly 9.6% of the outstanding stock -- valued at approximately $839 million.
There ain't no such thing as a free lunch (TANSTAAFL)
While Ally Financial stock is currently a bargain, it isn't without challenges. An environment of rapidly rising interest rates has pressured the company's results, narrowing the spread between the interest rates it earns from loans and what it pays to depositors. In the second quarter, Ally's net interest margin (NIM) of 3.4% fell by 0.13% sequentially and is down from 4% in the prior-year quarter. What's more, management doesn't expect much improvement this year. It's forecasting a full-year margin of 3.4%, with additional compression possible if the Federal Reserve Bank continues to raise interest rates.
However, while the Fed has signaled that additional rate hikes may be needed to bring inflation under control, it has also suggested that we may be nearing the end of that long road -- which would bring much-needed relief for Ally.
There's also the possibility -- however remote -- that the U.S. economy could slip into a recession or that interest rates could remain elevated for longer than expected. Consumer budgets are already stretched to the breaking point, pressuring Ally's auto lending segment. The company currently has a provision for credit losses of $427 million, compared to $304 million in the prior-year quarter. At the same time, delinquencies 30 days or more past due rose to 3.6%, up from 2.5% this time last year, which suggests that challenges remain.
That said, Buffett's Berkshire Hathaway wouldn't hold such a substantial stake in Ally Financial if it didn't believe there were better times ahead -- and Wall Street seems to agree. Analysts' consensus estimates call for Ally's earnings per share (EPS) to jump from an estimated $3.24 in 2023 to $4.34 next year, an increase of 34% -- though things could still get worse before they get better.
Given the dirt-cheap stock price, the looming potential for a rebound, and the Berkshire Hathaway seal of approval, now is the time to buy Ally stock before a recovery comes.
Bank of America is an advertising partner of The Ascent, a Motley Fool company. Ally is an advertising partner of The Ascent, a Motley Fool company. Danny Vena has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Bank of America and Berkshire Hathaway. The Motley Fool has a disclosure policy.
