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Top Hedge Fund Managers Are Buying Ally Financial

August 15, 2014 | About:
Chris Mydlo

Chris Mydlo

38 followers

Now that the investment management firms have filed their Form 13Fs with the SEC, we can gain better insight into which securities the investing gurus are buying and selling. The S&P 500 Grid at GuruFocus can be used to find the top buys, sells and net buys based on a number of different categories.

Using the grid, I found that many of the investing gurus have been initiating positions in Ally Financial (ALLY). There were 10 buyers of the stock in the second quarter and none of the gurus we follow have sold any shares. The buyers include hedge funds titans such as George Soros (Trades, Portfolio), Daniel Loeb (Trades, Portfolio), John Paulson (Trades, Portfolio), Howard Marks (Trades, Portfolio), and Jeremy Grantham (Trades, Portfolio). There is no other stock that has had as many buyers without at least one other manager selling. Daniel Loeb (Trades, Portfolio) of Third Point LLC has the largest position of 45.595 million shares, representing 9.45 percent of the shares outstanding and 13.4 percent of his portfolio. He actually obtained his position in private transactions prior to the IPO that occurred on April 10 of this year.

Ally was previously known as GMAC (General Motors Acceptance Corp) and was founded by General Motors (GM) in 1919 to provide financing to auto customers. Over the years GMAC expanded into insurance, online banking, mortgages and commercial finance. The bank had plenty of subprime loans on its books and had to be bailed out multiple times in 2008-2009 by the U.S. government after the subprime meltdown. During that period, the company rebranded itself as Ally Bank while it was restructuring.

The bank was able to remove itself from the subprime mess by allowing its mortgage subsidiary, Residential Capital (ResCap), to go bankrupt in 2012. Ally paid a $2.1 billion settlement to ResCap and the unit’s creditors in May of 2013. The CEO, Michael Carpenter, said that Ally overpaid in the settlement in order to avoid years of litigation and to get on with building the company and repaying the American taxpayer. With Carpenter taking this action, he was able to bring Ally back to the public markets and out of being majority owned by the government. Prior to the IPO, the bank was 75 percent owned by the U.S. Treasury Department. The remaining share owned by the U.S. Treasury is now at 15.6 percent.

Ally Bank is now focused on auto loans and retail banking and has a stronger balance sheet. The bank has no branches; therefore, it does not have the large expenses that come with a branch network. The savings are passed on to its customers in the form of very competitive interest rates on its banking products. From my experience as an Ally auto loan customer and part of a bank competitor intelligence team for another company, Ally provides an exceptional product that is easy to use. Using Bankrate.com (RATE) will verify the competitive interest rates and high rating on its products.

Daniel Loeb (Trades, Portfolio), Ally’s largest shareholder besides the U.S. Treasury, had the following to say about the company in Third Point’s 2013 Fourth Quarter Letter:

“…Ally’s underlying assets are low risk, with normalized credit losses of ~50bps and peak losses during the crisis of only ~100bps. The assets are short duration, typically 2½ to 3 years, resulting in a balance sheet that can quickly benefit from rising rates. These factors have led both debt and equity investors historically to apply low cost of capital requirements to securities backed by auto loans. We believe Ally is poised to grow its capital base and ultimately achieve a multiple significantly in excess of 1.0x book value, well above the valuation of our purchase levels.”

Currently, Ally is trading at a P/B ratio of 0.80 and in normal conditions banks tend to trade in a P/B range of 1.2 to 1.3. Just getting to a P/B ratio 1.0 leads to a 25 percent upside in the stock. The bank is now profitable and recorded a net income of $323 million and an EPS of $0.54 during the second quarter. Analysts are estimating a forward P/E ratio of 12.20. The median P/E ratio for the banking industry is 15.80. Considering its low P/E and P/B ratios compared with the industry, the stock is 25 to 30 percent underpriced. The stock closed at $24.15 on Friday, August 15. The stock should be priced more in the $30 to $32 range.

Now that the guru portfolios have been updated, you can use the tools at GuruFocus to spot any trends or to catch up with your favorite guru’s trades. I used the S&P 500 Grid to discover that Ally was a top pick of the gurus for the second quarter. You can also use the Latest Guru Picks to get a quick view of each of the gurus’ trades.

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