goeasy (TSX:GSY) is a magnificent growth stock, as demonstrated by the wealth it has created for its long-term investors. For example, in the last decade, an initial investment of $10,000 transformed into approximately $116,970. Roughly 76% of returns came from price appreciation and 24% from dividends.
That said, the trajectory of its stock price, as shown in the graph below, illustrates the riskiness of the stock. At times, the dividend stock can experience massive declines in its stock price.
GSY 10-year stock price data by YCharts
The last big drop from late 2021 to 2022 was triggered by a super rally from the 2020 pandemic market crash. The rally stretched the stock to stratospheric levels that were never before seen in the stock’s trading history.
At the peak, it traded at about 22 times earnings, which didn’t seem irrational at the time given the actual double-digit earnings growth in the underlying business. However, investors could rationalize that the stock’s long-term normal valuation is more or less a price-to-earnings ratio of 12. From this perspective, the stock was overvalued in 2021 and it was only a matter of time before the valuation normalized, perhaps waiting on a trigger like a new interest rate-cutting cycle in 2022.
Investors need not fear another massive decline of the kind in 2021/22 because the stock trades at just under 12 times earnings, which implies a fairly valued stock. If the stock does fall from current levels and maintains earnings growth, the correction is likely an opportunity to buy the growth stock at a discount.
Let’s see what its recent results tell us.
Earlier this month, goeasy reported its first quarter (Q1) results for the year. The leading Canadian non-prime lender continues to deliver solid results. It witnessed loan originations rising 12% to $686 million, loan growth of 6% to $207 million, the loan portfolio rising 29% to $3.9 billion, revenues rising 24% to $357 million, and adjusted earnings per share climbing 24% to $3.80. Return on equity for the quarter was 21.9%, which was still high.
Perhaps what worries investors is the macro environment. Interest rates have gone higher since 2022, making debt costlier and increasing the likelihood of Canadians not being able to pay interest or pay back loans. Statistics Canada indicated that the household debt service ratio rose from 13.5% in Q1 2021 to 15.2% in Q3 2023.
For now, goeasy is fine. As for the first quarter, it reported a net charge-off rate of 9.1%, which was still within its estimated range of 8.5% and 9.5%. However, if it edges higher, investors would see it as a red flag.
Long-term investors are probably okay buying the stock here, especially if they’re building a position over time. For example, ignoring the volatility in between, the stock delivered annualized returns of 29% per year from August 2013, when it was trading at about 12 times earnings. That is, it transformed an initial investment of $10,000 into about $156,488 for returns of about 1,465% in the period.
Since there is always a demand for non-prime consumer lending and goeasy continues to serve a good portion of that market, the stock is likely to maintain growth in the long run. Management has been operating the business well, and it is likely to navigate fine through whatever comes the company’s way.
At $178 per share at writing, the stock offers a dividend yield of 2.6% – a dividend that it increased by 27% per year over the last decade. Since the stock is fairly valued, it is at least a “hold.” For interested investors looking for a bigger margin of safety, they might consider buying shares on meaningful market corrections.
