A Look At Canadian Alternative Lending Stocks

This article was written by Priyanka Correia from Loans Canada. She specializes in creating digital content about personal finance, debt, and credit to help educate Canadian consumers. 

Stringent Canadian banking policies on mortgages, small loans, payday lenders, and other aspects of banking have impacted the supply and demand for alternative financing. Heavy regulations on payday lenders and small loan standards were leaving people with no real alternatives. This gave way to alternative financing which involves a broad range of non-traditional banking methods of obtaining funds. From 2013 to 2017, Canada’s alternative finance volume reached $1.5 billion overall and has been increasing in volume by 114% on average each year according to a report by the Cambridge Centre for Alternative Finance and the Ivey Business School at Western University. Consumer lending companies, in particular, had the biggest share of the market, making it a potentially lucrative investment opportunity. 

In fact, according to Google Trends the term “personal loans” has seen a gradual rise in web search volume over the past five years. Meaning, more and more people are looking into alternative lenders for their borrowing needs. This market trend is expected to continue due to several factors:

  • Normalization of online lending 
  • Increasing lending regulations 
  • Company structure

Normalization of Online Lending

More and more people are growing up with technology in their hands. Access to information through the internet clears any unknowns that come with lending online. Moreover, according to the Canadian Bankers Association, 398 million worth of mobile transactions were made in 2017 amongst six banks in Canada. Thus, it’s safe to say that consumers are becoming increasingly comfortable with managing their finances online. As more consumers become aware of these different lending practices, we are seeing more gravitate toward alternative lending because of its easy and fast services.

Company Structure

Alternative lending is an easy, fast, and simple way of getting approved for a loan that would be otherwise difficult and complicated with a traditional bank. Why? Many alternative lenders don’t just take credit rating into account; instead, they base their approval on a number of other factors including employment and income (interested in what alternative lenders are looking for when approving a loan?). Traditional banking repayment options are also heavily regulated and cannot be changed to fit each individual’s needs. However, subprime lenders are structured in a way that conforms to each consumer’s financial situation. This flexibility gives subprime borrowers borrowing and payment options that they previously did not have.

Increasing Lending Regulations

Recent banking standards on mortgages and small loan lending practices have led to an increase in the number of subprime individuals being rejected for short term financing. Canada has also been targeting payday lenders with new regulations like fee caps, missed payments fee limits, etc. These restrictions with banks and payday lenders are increasing the number of cash-strapped individuals with a lack of better options. This gap in the market provided personal lenders with the opportunity to bridge the space between these consumers who are considered a high-risk profile and their need for money.  

With a growing market, alternative lending looks like a lucrative area for investments. There are a number of factors to look at when deciding whether to invest in a company, but some obvious ones may be price to earnings ratios (P/E ratios), dividend payout, growth potential, etc. With that in mind, we’ve looked at six different private lenders to analyze and compare their investment value.

goeasy (TSX:GSY)

goeasy is one of the fastest-growing alternative lending companies in Canada. They offer personal loans between $500 to $35,000. Their company is catered toward the credit-constrained or subprime consumer. So what makes goeasy a potentially good investment? 

goeasy’s enterprise value is currently at $1.73 billion with a market cap of $966.786 Million. They have a strong history of paying out dividends in increments each year since 2015 and has a yield of 1.93%. Dividend payout and yield is a great indicator of the financial strength and future performance of the company. Moreover, when we compare their price to earnings ratio 13.52 to a well-established bank like RBC 12.37, goeasy’s price to earnings ratio is only marginally higher, with a lot more growth potential.

goeasy’s stock price has been increasing over the past 5 years. Since goeasy’s stock price seems a little volatile, there is an opportunity to buy at a lower price than it is right now: $64.05/ per share. According to Simply Wall St analytics, goeasy’s growth expectations look bright with earnings expected to increase by 23% over the next couple of years.

 Overall, goeasy looks like a strong investment option with room to grow in the future. 

Price: $64.05

Market Cap: $918.733 Million

P/E ratio: 13.52

Yield: 1.93%

Beta(3Y): 1.68

Mogo (TSX:MOGO)

Mogo is a financial technology company that offers a variety of financial solutions that can help subprime consumers with their finances. These include personal loans, fraud alerts, mortgages, and credit scores. They offer personal loans up to $35,000 and added a little over 200,000 new member accounts in 2018.

Mogo is expecting to gain more members by opening up their portfolio ranges as they introduce new products which will create a new consumer base and likely grow their market share. While Mogo is a direct lender, it continues to situate itself as a technology company within the market. They pride themselves on their innovation in FinTech and are recognized in the industry.

This is a particularly smart move as technology companies attract a healthy amount of investments from across the world. In fact in 2018, more than 39 billion was invested in FinTech globally according to ncfaCanada. 

Mogo’s enterprise value is $218.05 million with a market cap of $90.48 million. The company has no earnings and therefore does not have a P/E ratio, so we’ll take a look at how individuals within the Mogo realm are investing in the company to get a better grasp of their overall investment appeal. According to Simply Wall St, there have been many notable investments in the company. In particular, Michael Wekerle, a bank merchant or perhaps better known as the “dragon” investor on the T.V. show Dragon’s Den, bought 100,000 shares at $3.19/share. It is unlikely that a man such as Mr.Wekerle invested so heavily in a company that didn’t have any growth potential.

With their growing model and changing market, Mogo may be a company to invest in while it’s still small and affordable.

Price: $3.62

Market cap of $97.2 million.

P/E ratio – N/A 

Yield: N/A

Beta(3Y): N/A

IOU Financial (TSXV:IOU)

IOU Financial offers small business loans of up to $100,000 in Canada and $150,000 in the US. They work with a wide range of borrowers, including the subprime. The company has a market cap of $19.398 million with a stock price of 20 cents. It may also be worth noting that IOU Financial has a positive net amount of free cash flow, meaning they have the opportunity to increase shareholder value, pay dividends, and pursue new assets. 

When looking at IOU Financial beta coefficient, which is a measure of volatility or more simply put, risk-based on market activity is greater than one. A  beta coefficient greater than one means it is more volatile than the market and thus is higher risk. However, in comparison to goeasy’s beta value, IOU’s share price is less sensitive to the market changes. Overall, IOU tends to do well when the market demand increases and vice versa.

Price: $0.22

Market Cap: $19.398 million

P/E ratio: 16.34

Yield: N/A

Beta(3Y): 1.35

 Equitable Group (TSX:EQB)

Equitable Group Inc is an online financial service provider that offers Canadians mortgages, small business loans and saving investments. Though, Equitable Group runs more like a bank and has higher lending standards than other alternative lenders they still market to home buyers with subprime credit. According to an article by the Globe and Mail, Equitable Group is one of the largest alternative banks in Canada and it currently has control over about 35% of the subprime mortgage market. 

Equitable Group has a market cap of $1.897 billion and is expected to have an earnings growth of 12.4% over the next one to three years based on a stock analysis report by Simply Wall St analytics. Equitable group also has a strong history of paying an increasing amount of dividends each year since 2016. As mentioned before, dividend payment is a strong factor you can use to judge the attractiveness of a stock as it’s a good representation of financial strength and performance. 

Overall, Equitable is financially healthy and has the potential to grow further. It’s likely the Equitable stock is undervalued in its sector. 

Price: $113.3

Market Cap: $1.897 billion

P/E ratio: 10.27 

Yield: 1.23%

Beta(3Y): 1.5

 

Axis Auto Financial (TSXV:AXIS)

According to CMHC’s Mortgage and Consumer Credit Trends report, auto loan debt is the number one outstanding balance people with and without mortgages have. Axis Auto Financing caters to this demand by offering subprime Canadians with auto financing. They work with both independent and franchised dealers to create a number of financing options that can cater to their clients. 

Axis Auto Financial is currently one of the fastest-growing auto financing companies in Canada and has a market cap of $33.738 million. They are currently not making any profits, however, revenue has almost doubled since 2018. Moreover, according to Simply Wall St analytics, Axis Auto Financing earnings are expected to grow 108% over the next 1-3 years. They also have a beta value less than one meaning it’s not too sensitive to the market movements making it less of a risk. 

Price: $0.36

market cap: $33.738 million

P/E ratio: N/A

Beta(3Y): 0.97

Yield: N/A

Marble Financial Inc (TSXV:MRBL)

Marble is a young company that was launched in 2016. It offers subprime Canadians credit building solutions through their Fast Track Loan, a consumer proposal exit loan. It currently has a market cap of $9.931 million with a stock price of 19 cents. Moreover, Marble recently acquired a company called Score-up Inc; a company that builds consumer credit. With new proprietor information, Marble will be able to use it to create better value for its consumers which in turn will lead to greater growth. In fact, according to Simply Wall St analytics, Marble’s earnings are expected to grow by 61.1% over the next couple of years.

Price: $0.19

Market Cap: $9.931 million

P/E ratio: N/A

Beta(3Y): N/A

Yield: N/A

Bottom Line

Alternative lending companies are more volatile in nature, which means they may carry more risk due to their synonymous nature around the market. With the financial market being divided into two sets: a heavily regulated one versus one that is more relaxed, alternative lenders will have the capacity to feed the need of those who are being impaired by the tightening regulations around loans. This is what makes the alternative lending market interesting and worth looking at for future investments. Of course, nothing is ever set in stone when it comes to the stock market, so do your research and choose wisely. 

This article was written by Priyanka Correia from Loans Canada. She specializes in creating digital content about personal finance, debt, and credit to help educate Canadian consumers.