Your tech-heavy Tax-Free Savings Account (TFSA) portfolio nose-dived in 2022 and pushed your net worth into the red. It was a lesson that taught you to buy stocks with more tangible earnings at prices closer to 52-week lows. Buying a good stock at a high price won’t give you stronger capital appreciation than a slightly risky stock at a lower price.
Two stocks that could course correct soon
Tech stocks rely on future orders from faster adoption and cross-selling for growth. There is a degree of uncertainty that demand will fall. But what if you could see the future cash flows in the books and the only reason for not realizing those orders is bad debt or delay? Two such stocks with pending growth are goeasy (TSX:GSY) and Magna International (TSX:MG).
The non-prime lender goeasy has been increasing its revenue from processing fees and loan interest. It met its 2022 guidance for revenue and charge-off rate by sticking to its business model. As the company is in the credit business, it follows a model to lend money to a mixed group of non-prime people. It charges a high rate to those who are likely to default. It can give more such loans and increase its interest income, but that will also increase the credit risk of recovering the principal. Hence, goeasy maintains a balance between credit risk and interest returns.
The business model makes goeasy’s income predictable in a normal environment. goeasy funds its loan portfolio through revolving credit, bonds, equity, and securitization with leading Canadian banks. It knows the amount of loans receivables and payables and has a provision for bad debt. Hence goeasy’s profits are predictable.
goeasy expects to grow its loans receivable from $2.79 billion in 2022 to $3.5 billion in 2023 and $4.85 billion by 2025 while maintaining a net charge-off rate of 8-10%. The net charge-off rate is the percentage of loans receivable that goeasy believes is likely to default. The company expects to grow its operating margin from 32.6% to 38%.
There is always a downside risk. But with goeasy, the downside would be visible. Hence, the company revises the guidance in case of major changes beyond its control. goeasy stock is already on a course correction, surging 16.6% this year. As long as the charge-off rate is below 10%, there is room for more upside.
Magna stock took a 15.5% dip after it reported weak fourth-quarter earnings. The investors are overreacting. The company has given a positive growth outlook for the next three years, with an average annual revenue growth rate of 6.8%. The guidance comes as the automotive supply chain issues unwind, giving it the bandwidth to fulfil the long pending electric vehicle (EV) orders.
For Magna, there is no significant demand surprise, as automotive orders are a long process. The company builds the capacity depending on the orders. While there may be some hiccups in quarterly revenue, annual revenue remains on track. What disrupts Magna’s growth are industry-wide or macroeconomic issues beyond its control. At such times, the overall industry takes a hit.
The 2022 base year earnings were weak as semiconductor supply shortage, high energy prices in Europe and the idling of the Russian facility boosted operating expenses, slowed revenue, and reduced profits. The year 2023 could see an easing in semiconductor shortage, slightly lower energy prices, and a reopening of China’s economy. However, the easing of EV demand could slow its recovery.
Magna stock is 15% above its 52-week low and could course-correct before the second half in hopes of demand recovery.
Never concentrate your TFSA portfolio on one sector. Diversify your portfolio across stocks and asset classes that react differently to different economic situations. The above stocks could rally in an economic recovery. But also have exposure to gold stocks, which tend to grow in downturns, and utility stocks, which are less affected by macroeconomic situations and pay regular dividends.