Investors Eye Small Caps and REITs in Mixed Market Landscape

In a challenging market, investors are finding opportunities in rate-sensitive sectors. One analyst highlights benefits in stocks like Ally Financial and Realty Income, as well as a focus on small-cap ETFs amidst significant valuation gaps.

Date: 31-12-2024

AI Rating: 6

Market Performance Overview
The stock market in 2024 has shown a lack of bargain opportunities compared to the previous two years, yet rate-sensitive sectors like financials and real estate present interesting options. While megacap stocks performed well, smaller companies lagged.

Ally Financial Analysis
Ally Financial (NYSE: ALLY) suffered a 12% decline in 2024, contrasting with the 30% gain in the Financial Select Sector SPDR ETF. A jump in loan delinquencies accounted for Ally's poor performance following its third-quarter earnings report. Despite this, Ally's position remains intriguing due to its trading at a 12% discount to book value. The average yield on Ally's auto loans is 10.5%, and while experiencing a 2.24% charge-off rate, profitability remains potential. Furthermore, a falling rate environment could enhance Ally's net interest margin, which currently sits at 3.22%, with management projecting an increase to 4% or higher.

Realty Income Insights
Realty Income (NYSE: O) has been a longstanding investment for the author, with the stock down nearly 20% from its recent high. Realty Income owns approximately 15,500 properties and has tenants in recession-resistant industries. This REIT boasts a 6% annual dividend yield and has increased dividends for 109 consecutive quarters, underscoring its stability. The company has generated a 14.1% annualized total return since its public debut in 1994, outshining the S&P 500.

ETF Consideration
The Vanguard Russell 2000 ETF (NASDAQ: VTWO) is highlighted as an excellent investment opportunity, particularly given the wide valuation gap between small and large-cap stocks. The report notes small caps trading at remarkably lower price-to-book multiples compared to their megacap counterparts, making them potentially undervalued. An incoming business-friendly administration could also favor the smaller company sector.

Stocks: ALLY O VTWO