Growth stocks that have been hot the last few years, but heading into 2020 a lot of growth stocks look like they may be the most vulnerable, as the major valuations the companies have for their growth potential could be eroded with a fading economy.
Some of the best growth stocks, however, are seemingly unstoppable, and can likely execute to perfection and have another banner year.
As long as these companies can keep up their impressive growth rates, there’s no need for their valuations to come down, and in fact the stocks will continue to grow alongside the operations.
One of the top growth stocks that continues to beat expectations each year and is showing no signs of slowing down is goeasy Ltd (TSX:GSY).
goeasy is a specialty finance company engaged in non-prime consumer lending as well as furniture leasing.
Its growth rate has been incredible with its stock up by roughly 100% in 2019 and nearly 200% over the last three years. The growing stock price has been fueled by its underlying business and profitability, which have been increasing at exceptionally fast rates.
As goeasy serves non-prime borrowers and therefore takes on more risk than traditional lenders such as banks, it’s exposed to much higher returns, which has given the stock the momentum to grow so fast.
Although its portfolio technically does carry more risk, management has done an impeccable job of keeping the business as strong as possible, as is evidenced by its consistent charge off rates.
The more consistent it keeps its charge-offs, the better the company can grow its portfolio and budget for the future, which is part of the reason why goeasy has been so successful.
It also makes it easier to calculate the company’s break-even point of charge-offs, which is currently roughly 24% of all loans and nowhere near its current charge-off rate of approximately 13%.
In addition to the growth it has witnessed in revenue and net income, the company has also seen its business become more efficient. In the last five years, its return on equity has grown by 83%, increasing from 13.6% in 2014 to 25% over the last 12 months.
Its earnings before interest, taxes, depreciation and amortization (EBITDA) has also grown at an extremely rapid pace, increasing more than 135% since the 2014.
In addition to the other positive factors to invest in goeasy, the company also pays a dividend, which it has increased for the last five years, making it a dividend aristocrat.
The dividend is only a small portion of its earnings that it returns to investors, as it retains most of its earnings to reinvest in its growing loan book. Today the dividend yields roughly 1.75% with a payout ratio of just 26%.
Going forward, goeasy will continue to look to grow its loan book while prioritizing its stability, especially as consumer debt becomes one of the main factors to watch in the Canadian economy.
It’s also focused on improving the products it offers to its customers and the channels it offers to improve the customer experience.
While there is a risk that a recession can impact its business, goeasy has proven that it’s grown its portfolio with discipline, as is evidenced by its charge-off rates that remain consistent and manageable.
The company is targeting roughly 15% revenue growth in 2020 and estimates it can generate a more than 26% return on equity.
It’s still a relatively small company with a market cap of just over $1 billion, so there’s plenty of room for goeasy to continue to grow and make 2020 another rewarding year for investors.
