Over the past six months, Ally Financial has been a great trade, beating the S&P 500 by 5.7%. Its stock price has climbed to $40.87, representing a healthy 17.3% increase. This was partly thanks 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?

We’re happy investors have made money, but we don't have much confidence in 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 performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows 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

Tangible book value per share (TBVPS) is a crucial metric that measures the actual value of shareholders’ equity, stripping out goodwill and other intangible assets that may not be recoverable in a worst-case scenario.

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

Final Judgment

Ally Financial falls short of our quality standards. With its shares beating the market recently, the stock trades at 8.9× forward P/E (or $40.87 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are better investments elsewhere. We’d suggest looking at the most entrenched endpoint security platform on the market.

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