goeasy (TSX:GSY) stock has created massive wealth for long-term investors. For example, in the last 10 years, it turned an initial investment of $10,000 into approximately $124,260 for buy-and-hold investors! That’s a 12-bagger!
GSY Total Return Level data by YCharts
Of course, the fabulous investment came with its own unique set of risks, which has resulted in large declines in the stock at times. Here are some of the risks.
Regulatory risk
As a leading non-prime consumer lender in Canada, it is subject to regulatory risk. Last year, there was a overhang in the stock for much of the year, as it was hit by tighter regulation.
The company disclosed in March 2023 that the Government of Canada intended to reduce the maximum allowable interest rate to an annual rate of 35%, which triggered goeasy to lower its prior forecasts, but not by much because it had more wiggle room as a large operator.
Because goeasy has larger scale and greater diversification of products and services, it has been lowering the interest rates it charges consumers over time anyway. The regulation would probably speed up its efforts to lower interest rates for its customers. But at the end of the day, goeasy aims to help its customers jump into the prime-lending wagon and has had many successful cases over the years.
Economic risk
When there’s heightened uncertainty in the economy, investors will also likely sell off the stock. For example, during the pandemic year of 2020, the stock lost about 60% of its value from peak to trough. Around that time, there were economic shutdowns, and investors worried that bad loans would spike. Instead, the company ended up increasing its adjusted earnings per share by approximately 46% that year. It continued with strong double-digit growth in the following year, helping drive a tremendous run of close to 648% from the bottom of 2020 to the peak of 2021!
Interest rate risk
We know what happened next. The Bank of Canada, like many other central banks around the world, began increasing the benchmark interest rate in 2022, which drove stock valuations down, particularly for interest rate-sensitive businesses.
Actually, goeasy stock swam in euphoria for most of 2021, with its price-to-earnings ratio expanding to as high as north of 22, whereas its long-term normal valuation is closer to 12.
The above scenarios suggest that market sentiment driven by certain risks playing out could usher the stock too high or too low at times. This is something that investors in the stock should be aware of.
Is now the right time to buy goeasy stock? Here’s my take
A certain percentage of Canadians will always need to use goeasy’s non-prime leasing and lending services through easyhome (lease-to-own financing for home entertainment products, computers, appliances, and furniture), easyfinancial (for personal and home equity loans), and Lendcare (financing for powersports, automotive, retail, and healthcare). At the end of 2023, goeasy’s target market was about 9.3 million Canadians.
Importantly, at below $175 per share at writing, the stock trades at a reasonable valuation. So, I think it’s worth at least buying some shares in the stock now. However, there’s no question that it would generally be a safer investment on meaningful market corrections.
A possible strategy for interested investors is easing into the stock via commission-free trading platforms like Wealthsimple. The dividend-growth stock also offers a dividend yield of almost 2.7%, which is nice.
