Ally Financial Named a 2018 'Financing Favorite'

January 2, 2018 — 3:58 PM EST

Ally Financial Inc. (ALLY), the fintech spin-off of General Motors Company (GM), is expected to have a strong year in 2018, and it's not only because of its auto financing unit.

The company, which also operates the robo-advisory service Ally Invest and digital bank Ally Bank, is expected to benefit from those two businesses as well, landing Ally on Forbes magazine contributor MoneyShow's list of "Financing Favorites" for this year. In an interview, Mike Cintolo, chief analyst of Cabot Growth Investor, said that, with interest in financial stocks in general on the rise coupled with the likelihood that the Federal Reserve will raise interest rates this year, Ally Financial stands to benefit. In a rising interest rate environment, financial stocks tend to do well because the companies can charge more for their lending products such as auto loans.

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According to Cintolo, auto financing accounted for $300 million of Ally's $395 million in pre-tax income in its latest quarter, but its Ally Bank and Ally Invest arms should also add more this year, alongside growth in Ally's corporate finance and home loan businesses. "Ally's financial health has allowed an aggressive program of share buybacks that has reduced share count by 1.9% in the third quarter and by 8.3% since it started in Q3 2016. The company's dividend yields 1.7%, and its stock trades at a bargain 13 P/E," Cintolo said in the report.

The Forbes article is not alone in highlighting Ally's prospects this year. In December, Barron's named Ally Financial among the top 10 picks for 2018. "Ally Financial is one of the cheapest sizable financial companies, even after a 49% gain this year," wrote Barron's. Pointing to Ally's auto lending business, the financial media company said that the fintech is a rarity in the sector because it trades below tangible book value. Ally also has one of the biggest online retail deposit franchises at $75 billion and is benefiting from the replacement of high-cost debt with bank deposits.

While the main concern with the stock is a potential decline in used car pricing next year, that may be unfounded, as Hurricane Harvey and other storms this past summer destroyed roughly half a million cars, reducing supply and thus keeping pricing firm. There is also risk to the stock in the new year from its auto loan borrowers because 13% are subprime, reported Barron's.