Treasury To Cut Stake In Ally Financial As Loeb Buys

Ally Financial Inc (NYSE:ALLY) is up 3% in trading today, but with so many different news items it’s hard to say for sure which one is driving the price up. Arguably the most important long-term change is that the US Treasury announced that it would sell an additional 75.1 million shares of Ally on the open market, significantly reducing its stake and removing a major overhang that has kept investors away despite strong quarterly performance.

Treasury sale of Ally Financial stock is a significant net positive: BTIG

“While the U.S. Treasury’s sale of ALLY translates into increased supply of stock in the near term, we believe the announcement is a significant net positive,” writes BTIG analyst Mark Palmer who rates Ally Financial Inc (NYSE:ALLY) a Buy, reiterating the point he made back in May that the most likely reason the stock hasn’t picked up despite solid quarterly results is that investors knew there would eventually be another major offering.

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When Ally Financial Inc (NYSE:ALLY) held its IPO, there was a lot of skepticism that it would be able to make good on its plan to reach double-digit return on tangible common equity (ROTCE), but when it delivered an earnings beat for 1Q14 and raised its ROTCE to 6.5% the price jump lasted about a week before falling back to about $24. The upcoming Treasury sale (no specifics have come out so far) could depress prices in the short term because of the sudden supply glut, but if Ally can keep bringing the earnings beats it should finally get the price appreciation to go with them.

Other drivers behind Ally Financial’s price gain

Even if you agree that the Treasury announcement is good news for Ally Financial Inc (NYSE:ALLY), it’s not obvious that that’s what’s behind today’s gains. Dan Loeb’s Third Point has initiated a large stake in Ally just a couple of days after Howard Marks’ Oaktree Capital Management did the same thing. The increase in hedge fund interest could easily convince other investors to take another look at the stock.

Also, Ally Financial Inc (NYSE:ALLY)’s addition to the MSCI World Index as part of the indexes quarterly rebalancing, announced yesterday after the market closed, is probably playing a role in the stock’s gains because any product that tracks that index will now be picking up some of the stock.