The year 2025 has brought with it trade policy uncertainty and a change in the political leadership of Canada and the United States. Although the Bank of Canada has been slashing interest rates, the stock market has been volatile. Uncertainty presents the opportunity to buy value stocks whose management can survive the downturn and thrive in the upturn.
Where to find value?
Value is often found in the company’s financial statements, management’s discussion and strategy, and government policies. A crisis demands a calm mind and creative problem-solving approach. Along with these subjective traits, some objective traits, such as a strong balance sheet and free cash flow, determine the company’s flexibility to sustain weak sales.
Is goeasy stock a value pick?
goeasy (TYSX:GSY) stock fell 20% in the last 12 months and is trading at a price-to-book ratio of 2.1 times, lower than its five-year median of 2.4 times. The stock fell as the current macroeconomic situation is not conducive for a non-prime lender like goeasy. The fear of recession and rising inflation has reduced consumer spending and increased credit risk.
However, two things are working in goeasy’s favour, which make it an interesting value pick.
First is the rule setting the maximum allowable rate of interest at a 35% annual percentage rate (APR), effective January 1, 2025. It means lenders cannot charge more than 35% interest on loans. goeasy will feel less impact as 67.1% of its loan portfolio carries an APR of 35% or less. However, this legislation might prove disruptive to lenders who give high-risk loans and charge exorbitant interest, reducing competition for goeasy. In the long term, goeasy could benefit from lower competition and improve the quality of its loan portfolio.
Second, the Bank of Canada has been reducing interest rates, making borrowing affordable. goeasy has funded its loan portfolio using a mix of equity, senior unsecured notes, and a securitization facility. Its borrowing cost increased from 5.2% in 2022 to 6.8% in 2024 when the Bank of Canada hiked interest rates. The rate cuts could reduce goeasy’s borrowing cost, which it can pass on to customers and issue more loans under the 35% APR bracket.
goeasy can sustain a downturn by controlling credit risk through a strong product mix, credit protection insurance, and more. A recovery in the economy could revive loan demand, and goeasy will be better positioned to tap the growth. You could consider buying the stock at the dip and locking in a 3.7% dividend yield.
Telus Corporation
Telus Corporation (TSX:T) is another interesting value stock that is navigating through the industry headwinds and tapping the 5G opportunity. Industry and macro headwinds have pulled the stock price closer to its 10-year low. However, its secular growth prospects make it a value buy.
Regulatory changes have allowed competitors access to Telus’s and BCE’s 5G infrastructure, making prices more competitive. Moreover, the Canadian government’s immigration policies could reduce new customer additions in the coming years.
While BCE is retaliating by expanding its fibre infrastructure in the United States, Telus is adapting to the change by offering its bundled services on competitor networks. Capturing market share could mitigate the impact of a slowdown in new customer additions.
Another aspect is the significant debt sitting on Telus’ balance sheet. The management is focused on reducing its debt and bringing the leverage ratios within its target range. These efforts, bundled with interest rate cuts, will help Telus lower its interest expense and improve margins even in a competitive pricing market.
On the secular growth front, the company is looking to monetize the 5G technology as more internet-of-things devices and artificial intelligence (AI) services spring up.
Telus stock has already recovered 13% from its 52-week low in December 2024 and is trading at a price-to-earnings (P/E) ratio of 28 times, its lowest in 18 months. Now is a good time to buy the stock to hop on the recovery rally early and lock in a 7.4% dividend yield.
