The last year was a major year for markets and some of the best-performing stocks were growth stocks.
The fear in the markets toward the end of 2018 created great buying opportunities for those investors who were positioned well and investing for the long term. The buying opportunity that many investors took advantage of fuelled a major rally throughout 2019.
For growth stocks, some of the best news they can get is by exceeding their growth numbers the market sets for them, which this stock we are about to talk about did in 2019.
The other major news that helps increase the valuation of growth stocks are by getting continuous analyst upgrades, which is exactly what happened to goeasy Ltd (TSX:GSY) this past week.
Analysts at TD Bank’s securities division have been impressed with goeasy. Unlike traditional bank stocks, which they believe will struggle to grow earnings meaningfully over the near term, the analysts believe goeasy can continue to outperform.
Thus far, their estimates, which have seemed ambitious, have continually been met by goeasy year in and year out. Now their new estimate looks like it can be easily reached by goeasy.
TD Securities increased their price target from 70 to $84, a roughly 20% premium from where the stock is today.
Part of the reason for its increased target price is the increased valuation the securities division believes it warrants, now valuing it at 12.5 times forward earnings rather than 11.0 times, which it valued it at previously.
goeasy has been on a roll the last few years; its incredible track record of success is reflected by the major rally its share price has seen over the past few years, more than doubling investors’ money.
The company has been expanding its loan book rapidly while also stabilizing the business and reducing its charge-off rates. It’s also managed to make the business more profitable, growing its return on equity to roughly 25% in 2019, and expecting to exceed 26% in 2020.
Its business continues to see an increase in demand, and goeasy has figured out how to mitigate the risk in its portfolio to build a highly sustainable business.
Although it caters to mostly non-prime borrowers, the company is flexible with the loans it offers its customers, and realizes that by making more of an effort to have the loan fit the customers’ needs, there is a higher chance that it will ultimately be being paid back.
The stock may only pay out a dividend that yields 1.75% today, but it has become a dividend aristocrat for its continued growth of its dividend each of the last five years.
This is positive especially for long-term shareholders, as it retains most of its cash now while it’s still growing its business rapidly. When it decides to transition from high-growth, however, the company can then begin to pay out the majority of its earnings. Because of the track record it’s establishing for itself, it could be one of the most reliable dividend payers on the TSX.
Going forward, there isn’t too much risk associated with it; with any lending company, there’s obviously some counter-party risk and risk of a recession causing higher charge-offs.
In terms of something that would really impact investors’ holdings, however, it would take a catastrophic event to impact goeasy’s business enough that it was no longer breaking even on its loan book.
Similar to the TD Securities analysts, I also expect goeasy to be the best-performing stock of all the financials over the next few years. It’s incredible growth rate and prudent management of risk has positioned it well for the coming years, giving it the potential to double your money once again.
