Ally Financial’s 16.5% return over the past six months has outpaced the S&P 500 by 5.2%, and its stock price has climbed to $41.37 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is now the time to buy Ally Financial, or should you be careful about including it in your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Do We Think Ally Financial Will Underperform?

Despite the momentum, we're cautious about Ally Financial. Here are three reasons we avoid ALLY and a stock we'd rather own.

1. Long-Term Revenue Growth Disappoints

A company’s long-term sales performance is one signal of its overall quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years.

Regrettably, Ally Financial’s revenue grew at a sluggish 4.3% compounded annual growth rate over the last five years. This fell short of our benchmark for the financials sector.

2. EPS Barely Growing

Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.

Ally Financial’s EPS grew at an unimpressive 9.2% compounded annual growth rate over the last five years. On the bright side, this performance was better than its 4.3% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.

3. Substandard TBVPS Growth Indicates Limited Asset Expansion

We consider tangible book value per share (TBVPS) an important metric for financial firms. TBVPS represents the real, liquid net worth per share of a company, excluding intangible assets that have debatable value upon liquidation.

Disappointingly for investors, Ally Financial’s TBVPS grew at a mediocre 7% annual clip over the last two years.

Final Judgment

We cheer for all companies supporting the economy, but in the case of Ally Financial, we’ll be cheering from the sidelines. With its shares topping the market in recent months, the stock trades at 9.1× forward P/E (or $41.37 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. Let us point you toward one of our top digital advertising picks.

Stocks We Like More Than Ally Financial

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