Some say a recession is coming, and some say a rebound is coming. While the markets are unpredictable, a rebound is certain. Unlike a bubble that inflates the price of a stock, a rebound corrects the price of a value stock and can bring higher than normal returns.
But finding such value stocks is a challenge. You have to look at a company’s fundamentals. If the fundamentals are unaffected by the market sentiment and the short-term guidance shows growth, the stock is worth a buy at the dip.
Two stocks to buy before a market rebound
Here are two value stocks that dipped in the bear market and have the potential to surge in a market rebound.
Sub-prime lender goeasy (TSX:GSY) stock fell 40% in 2022, while its revenue and profit surged 23% and 10%, respectively. The company also increased its dividend per share by 5.5%. While its current fundamentals are strong, its future is also positive.
goeasy is growing its loan portfolio through acquisitions, cross-selling, and recurring loans. It added auto financing and expanded its point-of-sale (POS) offering. The lender is funding its loan portfolio through securitization, unsecured loans, and equity, increasing its 2022 borrowing cost to 5.2% (from 4.9% in 2021).
In a recessionary environment, the biggest risk is credit risk, and goeasy has been reducing this risk by increasing its secured loans to 39% and maintaining the weighted average credit score of new loans above 600. The company is improving the credit score of its customers that is reducing the interest rate on its loan portfolio. Meanwhile, borrowing cost is rising, reducing its total yield on consumer loans to 36.2% in the fourth quarter from 41.4% in the previous year.
goeasy has given an optimistic outlook for the next three years. It expects to increase gross consumer loan receivable from $2.795 billion in 2022 to $3.5 billion in 2023. The 2022 dip has put goeasy stock at a sweet value of 4.25 times enterprise value to revenue. Its current enterprise value is $4.33 billion on 2022 revenue of $1.02 billion. If goeasy achieves its guidance of $1.63 billion revenue at the midpoint by 2025, the stock could surge 60% in three years to $198 to maintain the 4.25 times ratio.
Another value stock that fell in 2022 is cybersecurity and automotive operating system provider BlackBerry (TSX:BB). You must have read the news about how Elon Musk once again became the richest man after Tesla’s stock rebounded 92% this year. It hints that the electric vehicle (EV) trend is returning. The recession may not be as bad as you thought.
Now is the time to buy BlackBerry, which is sitting on $560 million of unrealized royalty revenue (about 85% of its annual revenue) due to a delay in car production. The company spent the last year getting design wins from major automakers, and this could be the year when these efforts come to fruition.
Meanwhile, a slowdown in interest rate hikes and an improvement in the economic environment could seal several pending cybersecurity deals and renewals in the second half. Like goeasy, BlackBerry stock is trading at 4.47 times its enterprise value to revenue. This revenue is about to get a boost. If BlackBerry achieves its 2025 revenue target of $886 million (from $655 million in 2022), the stock could surge 50% to its average price of $8.
If you have $1,000 to invest, buy the above two stocks now through your Tax-Free Savings Account and hold them for two years. In this duration, these stocks investment could grow your money to $1,500 or more, given that they rebound from a bear market.
At the same time, do not forget to diversify your portfolio across dividend stocks, exchange-traded funds, real estate investment trusts, and other asset classes. It is always good to have some exposure to investment securities that respond differently to a given market situation.