Every quarter, investment managers with more than $100 million in assets make moves in their portfolios and report their holdings in a 13F filing after the quarter closes. Fund managers are always making tweaks, adding to and trimming holdings and reallocating capital to new positions. It’s fairly run-of-the-mill stuff, but when an investor of Warren Buffett’s caliber triples his stake in a company, the rest of the investment community tends to take notice, thanks to his track record as one of the most successful value investors of all time.
What stock did Buffett triple his position in?
And that’s exactly what just happened. According to the just-released 13F filing for the second quarter, Buffett’s Berkshire Hathaway has increased its position in Ally Financial (ALLY -2.58%) by 234%. Buffett now owns 30 million shares of one of the nation’s leading online banks with a position worth just over $1 billion.
Buffett has long had a penchant for banks and financial institutions, especially undervalued ones. Bank of America has been a mainstay in Berkshire’s portfolio for years and is its second-largest holding. Berkshire also has large positions in US Bancorp, Citigroup, and Bank of New York Mellon Corp.
What does Buffett like about Ally?
So what does Buffett like about Ally? First and foremost, he almost certainly likes the value he is getting. Shares of Ally Financial trade at just 5 times earnings, which is way below the average market multiple. The company also trades at a price-to-book-value ratio of just under 1. Price-to-book-value is a key metric many investors use to value banks and other financial stocks. Book value is just all of a company’s assets minus its liabilities. Price-to-book-value measure’s the company’s stock market valuation versus this value. A company with a price-to-book-value of under 1 is thus theoretically trading for less than the net value of its assets if the company were to be liquidated, making it a compelling valuation and one that gives investors a margin of safety.
Additionally, Ally is generating an impressive return on equity of 18%. A high return on equity indicates that a company’s management team is good at generating profits from the capital it has.
Now, why is Ally valued so cheaply? Stocks of many banks are cheap right now because they can be cyclical, and many investors are hesitant to own them in the event that the U.S. economy goes into a recession. Ally also has a large presence in auto lending, something making investors even more skittish in this environment. But Buffett has always been, as he has said, “greedy when others are fearful” and clearly he seems comfortable holding Ally and other banks in this environment. Buffett knows better than almost anyone that investing is a long-term game and that it’s never a bad idea to pick up shares of quality companies at discounted prices when the market sentiment is cautious.
Monster returns to shareholders
In addition to its favorable valuation, Ally is also returning a lot of capital to shareholders. Ally pays a dividend, and shares yield about 3.3%. Ally has now increased its dividend payment for seven years in a row. Ally is also returning capital to shareholders with an enormous share-buyback program. This past January, the company announced a $2 billion share-repurchase program, which is equivalent to nearly 20% of the company’s market cap. This adds value for shareholders because it drastically reduces the number of shares outstanding and increases earnings per share. The company also completed a $2 billion share repurchase in 2021, so it is a serial buyer of its own stock, which is certainly an attractive feature to Buffett.
Should you follow Buffett into Ally?
Even after tripling his stake, Ally is still a fairly small position for Buffett; thanks to the scale of Berkshire’s portfolio, Ally makes up just 0.33% of the total. However, this also means Buffett has plenty of room to keep increasing his position if he likes Ally’s results and performance. As we’ve seen with Occidental Petroleum this summer, Buffett can act quickly and amass a huge position. Investors should always do their own research and make their own decisions rather than blindly follow a star investor into a stock, but Buffett is a good place to look to for inspiration.
With Buffett’s stamp of approval, and a large margin of safety thanks to the company’s cheap valuation, Ally looks like a good place for investors to follow Buffett’s lead. The company’s propensity to return capital to shareholders via both a growing dividend and a sizable share-repurchase program are also positives for investors.
Ally is an advertising partner of The Ascent, a Motley Fool company. Citigroup is an advertising partner of The Ascent, a Motley Fool company. Bank of America is an advertising partner of The Ascent, a Motley Fool company. Michael Byrne has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Berkshire Hathaway (B shares). The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway (B shares), short January 2023 $200 puts on Berkshire Hathaway (B shares), and short January 2023 $265 calls on Berkshire Hathaway (B shares). The Motley Fool has a disclosure policy.