Behind Warren Buffett’s increasing bet on this under-the-radar American lender

Published Wed, Aug 17 202211:36 AM EDT

Warren Buffett's Berkshire Hathaway more than tripled his bet on Ally Financial in the second quarter, giving the conglomerate a near 10% stake in this under-the-radar U.S. auto and home lender. Berkshire ramped up its Ally holdings to about 30 million shares and was worth more than $1 billion at the end of June, according to a regulatory filing. The conglomerate now has a 9.6% stake in the company, making it the second biggest shareholder after index giant BlackRock, according to InsiderScore. Ally Financial has benefited immensely from a surge in consumer demand for new and used cars during the pandemic, resulting in an over 50% gain in share price from 2020 to 2021. However, the stock is down more than 20% this year as the auto market started to stabilize and higher interest rates dented consumer appetite. Still, Ally's 2022 decline made the stock cheap relative to its peers, which could have appealed to the legendary value investor. The stock now trades at only 1.0x tangible book value, according to Piper Sandler analyst Kevin Barker. The conglomerate first bought just under 9 million Ally shares, and the Omaha-based giant significantly added to the stake during the following quarter when the stock dropped more than 20%. The dip-buying action has been a classic move for Buffett, who explained his thinking during this year's annual shareholder meeting. "We have not been good at timing. We've been reasonably good at figuring out when we were getting enough for our money," Buffett said in Omaha in April. "We always hoped it would go down for a while so we could buy more." Berkshire has been a net buyer for stocks for three straight quarters, according to regulatory filings. The conglomerate also increased its massive Apple holding , while ramping up its Occidental and Chevron bets. "Buffett was true to his word as every stock with increased holdings this quarter was either a new addition in the previous quarter or had additional shares purchased in the first quarter," said Bill Stone, CIO of The Glenview Trust Company and a Berkshire shareholder. Robust demand Some analysts believe demand for auto loans remained strong, which creates a tailwind for Ally. The company originated $13.3 billion in retail auto originations in the second quarter, representing the highest quarterly amount since 2006, JPMorgan analyst Kabir Caprihan pointed out. "Consumer demand for auto loans remains robust, and the rising rate environment coupled with the supply chain challenges are expected to benefit net interest income growth," Caprihan said in a note. The stock is generally well liked among Wall Street analysts, too, with more than three-quarters of those covering Ally rating it a buy. Ally was founded in 1919 by General Motors, formerly known as the General Motors Acceptance Corporation (GMAC), to provide financing to automotive customers. Ally remained GM's car financing arm until 2010 when the company was spun off and eventually rebranded. While Berkshire's stake in Ally is just under 10% now, it's not hard for some to see how the auto loan business could go hand in hand with the conglomerate's core insurance business. Berkshire owns auto insurance giant Geico. At the end of last year, Ally acquired credit card company Fair Square Financial for $750 million, seeking to expand its scope of business. —CNBC's Michael Bloom contributed reporting.