Stock Up Sale
Wealthsimple is an excellent platform for low-cost trading. In fact, you can trade Canadian stocks on the platform for free. There are only additional foreign exchange fees if you’re investing in foreign stocks, including U.S. stocks. This way, Canadian investors can very well build positions in solid Canadian companies at no cost.
A growth stock that outperforms
Here’s one Wealthsimple stock that could crush the market in the long run. You should have goeasy (TSX:GSY) on your radar. Any stock that has a long-term track record of outperforming the market and its sector should be on every investor’s watchlist.
As the graph below illustrates, an investment of $10,000 in goeasy stock 10 years ago turned into about $97,260 for incredible annualized returns of just north of 25.5%. In comparison, the Canadian stock market, using iShares S&P/TSX 60 Index ETF as a proxy, delivered returns of almost 7.7% per year. And the iShares S&P/TSX Capped Financials Index ETF that provides exposure to Canadian financial companies delivered almost 8.1% per year in the period.
GSY, XIU, and XFN Total Return Level data by YCharts
To be clear, goeasy is not a holding of the XFN exchange traded fund, which offers exposure to 10 Canadian financial companies, including the Big Six Canadian bank stocks, three insurance companies, and an asset manager. As a leading Canadian non-prime lender, goeasy provides exposure to a smaller niche of the financial services sector.
As the graph displays, goeasy could provide higher growth and returns, but investors must be willing to take on higher risk and volatility.
Risk and opportunity
goeasy is likely to be weighed by regulation and the risk of a higher chance of an upcoming recession in the near term. In late March, the Government of Canada announced its intent to reduce the maximum allowable interest rate (the annual percentage rate (APR)) to 35% per year, which goeasy management confirmed would have less of an impact on goeasy than on smaller-scale peers.
In fact, as the company has grown its scale, it has steadly reduced its average APR. The lender has also helped its consumers improve their credit scores and therefore reduce their interest expenses over time (if only interest rates stayed constant).
Higher interest rates and the scarcity of capital in the current macro environment could encourage more Canadians to use goeasy’s offerings, which include lease-to-own financing offerings for home entertainment products, computers, appliances, and household furniture, as well as personal loans, home equity loans, and point-of-sale financing across more than 4,000 merchant partners through the acquisition of LendCare that was established in 2004.
A solid investment at a good valuation
Currently, goeasy offers a good balance of value and growth. Management forecasts achieving a return on equity (ROE) of at least 21% through 2025. It expects the loan book to grow at the high-end of its forecast range, to $3.6 billion, by the end of the year. In the first half of the year, loan originations were $1.3 billion, up 16% year over year. As well, the adjusted earnings per share climbed 15% to $6.39, and it reported a ROE of 23.6%.
At just under $107 per share at writing, the growth stock trades at about 8.2 times adjusted earnings, which is more than a 30% discount from its long-term normal valuation. Analysts think it trades at an even steeper discount of approximately 38%.
Fair enough, goeasy stock’s dividend yield of 3.6% isn’t as attractive to investors given the income options from lower-risk fixed income investments like guaranteed investment certificates and bonds in a higher interest rate environment.
However, the company is capable and management seems willing to continue increasing its dividend. For the long haul, the growth stock has a good chance of crushing the market returns at today’s compelling valuation.
