1 Canadian Oversold Stock for High-Risk Investors

Is it a good time to buy high-risk stocks? This oversold stock could double your money if it withstands the looming recession.

| More on:
Road sign warning of a risk ahead

Image source: Getty Images.

You’re reading a free article with opinions that may differ from The Motley Fool’s premium investing services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn more

It’s said that with great returns comes great risk — but not always. Some high-risk stocks are on the verge of bankruptcy. The odds of them giving returns are low. But there are also high-risk stocks that have strong balance sheets that face a tough market environment.

No matter how many times a stock has survived a recession, past performance does not guarantee future returns. Such stocks have a higher risk but also a higher probability of better returns. One such high-risk stock is goeasy (TSX:GSY).

The oversold stock with high risk 

“Risk comes from not knowing what you’re doing.”

Warren Buffett

One way to put the risk at ease is by creating a simulation of various scenarios and training yourself. But no matter how hard you train, the real world has an element of surprise, and your decisions at that moment determine the outcome.

Non-prime lender goeasy survived the 2007-08 recession, the 2018 trade war, and the pandemic. The stock has fallen 20-50% in past recessions and made new highs in the following growth periods. 

goeasy provides short-term leasing and lending services through its easyhome, easyfinancial, and LendCare brands. It has partnered with over 4,000 merchants in retail, power sports, automotive, home improvement and healthcare verticals to help customers buy products on loan. It did well during the pandemic, as Canadians used stimulus money to pay off their loans. But this may be unlikely in the looming recession. 

How a recession impacts non-prime lending 

The overall stock market is in a downturn since the stimulus bubble burst, with goeasy stock down 53% from its September 2021 high. Even after this dip, the stock is trading 43% above its pre-pandemic level. This is because the company improved its revenue and profits during the pandemic. goeasy entered automotive financing and a securitization facility with banks to expand its business. 

But now it faces another period of stagflation and maybe a recession. But these warnings pertain to the United States, and Canada could feel the pinch. However, it is unclear how big a pinch it would be. In a recession, prices of essentials grow to unaffordable levels. The central banks increase interest rates to discourage lending. As loans are not easily available, non-prime customers reach out to companies like goeasy to make ends meet. 

This stage was visible in goeasy’s quarterly earnings, where it saw a record level of first-quarter loan growth (up 307%) led by significant organic growth. That is a material increase in a seasonally slower period. This hints that people bought ahead of interest rate hikes. 

The next stage is stagflation. The rising interest rates are ineffective in controlling inflation because prices remain high due to supply shocks. This growing inflation and interest rate put pressure on consumer demand, stagnating economic growth. Bringing down supply in line with demand is easier. But bringing down demand in line with supply has significant repercussions. 

A slowdown in consumer demand impacts employment, which reduces disposable income. Non-prime lenders are the worst hit and could default as they cope with rising prices. The prices fall when supply constraints ease and match the demand. Until supply eases and prices drop, there is a heightened risk of default, which makes goeasy a risky stock. 

The oversold stock with a higher probability of better returns 

If you look at the current fundamentals of goeasy, they look bright. But the stock is in the lending business, where the balance sheet is more important than the income statement. A large-scale default could push the non-prime lender into a multi-year loss.

It has a $900 million securitization facility with banks. Even if customers default, goeasy will have to pay interest to its lenders. The impact of a looming recession is hard to predict. The company may or may not face a significant default. If the default risk is manageable, the current stock price is an attractive valuation, and the stock could double your money during the economic recovery. 

The probability of goeasy surviving the looming recession with lower default risk is high, as past recessions have trained it well on balancing defaults. You can invest a small amount in the stock with a stop loss at a 20% dip.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Puja Tayal has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.

More on Investing

Increasing yield
Dividend Stocks

3 High-Yield Dividend Stocks to Buy and Hold Forever

Young and old income investors can sleep easy by holding three high-yield dividend stocks for the long term, if not…

Read more »

Dividend Stocks

1 Under-the-Radar Dividend Stock to Buy for Monthly Passive Income

This dividend stock offers investors a whopping 9.02% dividend yield that's remained stable for over a decade.

Read more »

energy industry
Energy Stocks

Warren Buffett Is Going All-In on Oil: Should You?

Warren Buffett is buying oil stocks. In the past, he owned Canadian oil stocks like Suncor Energy (TSX:SU)(NYSE:SU).

Read more »

oil and natural gas
Dividend Stocks

Passive Income: 4 TSX Energy Stocks With Incredible Dividends

TSX energy stocks are gushing cash. Here are four top stocks to own for a combination passive income and capital…

Read more »


Restaurant Brands International Stock: My Favourite Dividend Bargain on the TSX

Restaurant Brands International (TSX:QSR)(NYSE:QSR) stock is a dividend juggernaut that's finally starting to get on the right track.

Read more »

TSX Today
Energy Stocks

TSX Today: What to Watch for in Stocks on Thursday, August 18

An overnight recovery in oil and metals prices could help the commodity-heavy TSX benchmark to open slightly higher today.

Read more »

A small flower grows out of a concrete crack.

3 Top Stocks You Can Still Buy for Under $20 a Share

Canopy Growth stock (TSX:WEED)(NASDAQ:CGC) and these two others are incredible investments to consider as we continue to move out of…

Read more »

Automated vehicles
Tech Stocks

Want to Be a Millionaire? This 1 Canadian Stock Could Soon See a Blistering Rally

If you can take the risk of buying falling shares of some companies with a solid growth outlook, they could…

Read more »