Ally Financial IPO: Investors Should Sit This One Out

Risk exposure and a narrow business are cause for concern

   
Ally Financial IPO: Investors Should Sit This One Out

2014 has been a hot year for IPOs, and the second quarter is already off to a fast start. The latest that has the Street buzzing is Ally Financial, which is set to begin trading on Friday under the ticker symbol ALLY.

Ally 150x150 Ally Financial IPO: Investors Should Sit This One OutThe auto loan giant is getting a lot of attention because it received $17.2 billion in bailout funds from the government’s TARP program six years ago due to its connection as the financial arm of General Motors (GM).

The Treasury Department plans to sell 95 million shares at about $25-$28 per share, and could raise as much as $3 billion – making it the largest new U.S. listing in two years. The deal would recoup the remaining outstanding TARP funds that Ally owes, so this sell-off is a big sigh of relief for taxpayers.

But is it a win for investors, too?

While it’s no secret that I’m a fan of the financial sector, Ally presents several reasons on its own to be cautious about jumping in; add in the risk that splashy IPOs often carry, and I am staying firmly away.

First of all, the move to public trading isn’t about faith in future growth, as many IPOs are (think social media and tech stocks), so it doesn’t carry a significant promise of upside potential. The IPO also won’t raise any money for the company since proceeds are going directly in the government’s pocket, leaving Ally without additional funds to grow its business.

Another major concern is that Ally carries a lot of risk exposure to the economic recovery, given its susceptibility to the auto, real estate and bank sectors. At any sign of consumer weakness, the market will punish the stock severely. That kind of vulnerability in the current volatile trading environment expected to continue through the second quarter is not something I’d want in my portfolio right now.

Ally will pretty much serve as an auto lender going forward, and I do not see that business valued much above book value. While the company is trying to raise interest margins by increasing deposits, I don’t think that substantially changes the underlying risk of the model.

The Ally IPO may have the government cheering, but for investors, I recommend you sit this one out.

 


Article printed from InvestorPlace Media, http://investorplace.com/2014/04/ally-financial-ipo-investors-sit-one/.

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