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Despite Hitting All Time Highs, Is This Canadian Stock a Buy?

Posted on July 21, 2021 by Dylan Callaghan

Disclaimer: The writer of this article or employees of Stocktrades Ltd may have positions in securities listed below. Stocktrades Ltd may also be compensated via affiliate links in the post below.

When we think of the financial sector in terms of Canadian stocks, we don't necessarily think of high growth.

We have Canada's Big 5 banks, which arguably are some of the best income options on the planet, and we have our insurers, which are well capitalized and have provided steady income for Canadians for decades.

But, neither of these groups will provide world beating growth. You can expected mid single-digit annual appreciation to go along with a 3-5% dividend yield.

But what if I told you there was a particular niche of the finance sector that was experiencing explosive growth? 

That area is the alternative lending industry. And today we're going to look at a popular Canadian company that is providing next level gains to Canadians who own shares of it.

Goeasy Ltd (TSE:GSY) is one of the best financial stocks in Canada over the last decade

Canadian bank stocks are no slouches in terms of returns over the last decade. But if we look to the chart below, we'll see that alternative lender Goeasy ltd (TSE:GSY) has produced tenfold the returns.

TSE:GSY returns vs Canada's banks

Why has it been able to do so? Primarily due to a surge in the popularity of alternative lending companies here in Canada.

These alternative lenders are not handcuffed by extensive lending restrictions that major institutions are, and as a result many Canadians who are shut down by the banks head to companies like Goeasy.

The company not only provides unsecured installment loans to customers, but also loans to purchase things like furniture, electronics, and appliances.

So, Goeasy Ltd must have higher risk borrowers then, right?

Not necessarily. In fact, the company has been continually reducing bad debt provisions due to the increase in underlying credit quality of its loans.

A customer of Goeasy Ltd typically has less debt than one of a major bank. This is because the vast majority of Goeasy Ltd customers (over 80%) do not have a mortgage. 

Delinquency rates did rise during the pandemic, but were still low and completely manageable. And if we compare the first quarter of 2020 to now, delinquency rates have decreased by 100 basis points (1%).

The stigma of Goeasy being a company that is on the verge of collapse due to its poor loan portfolio is factually incorrect, and somewhat of a lazy assumption. This is a company that is in an outstanding financial position.

Key catalysts that make Goeasy Ltd a strong option even at all time highs

It's pretty rare that you can find a company that not only supplies an excellent dividend to its investors, but also outstanding growth.

Goeasy Ltd is one of those companies. In fact, prior to its recent runup you could have considered it a triple threat in the fact it provided growth, income, and was trading at attractive valuations.

First, lets look at the dividend. The company has a growth streak of 6 years, making it a Canadian Dividend Aristocrat. And over the last half decade, it's grown its dividend at a 35% clip annually.

Yes, you read that right. 35% annual dividend growth for Goeasy investors over the last 5 years. This means that the company is expected to double its dividend every 3 years. Its most recent raise came in even higher than average at 45.16%.

You'd think a company raising its dividend at this fast of a clip would be running out of room. However, the company has a payout ratio of only 11%, indicating that this level of dividend growth will likely continue into the future.

At 1.63%, its yield isn't ground breaking. However, when a dividend is growing this fast and its yield is staying relatively low, there's only one reason for this, and that is rapid share appreciation.

Goeasy Ltd stock has provided outstanding capital appreciation

Goeasy Ltd 10 year total returns

Another catalyst for Goeasy moving forward is the rising popularity of alternative lenders, which will lead to further outsized growth via capital appreciation.

If you had thrown $10,000 into this relatively unknown company 10 years ago, you'd now be sitting on $274,000. And keep in mind, Goeasy Ltd has a market cap of only $2.6B. Technically this is still considered a small cap stock, and it has plenty of room to run.

The company's outlook is strong, and its recent acquisition of Lendcare gives the company access to over 50,000 customer accounts and a $400M loan portfolio consisting of powersports, auto, retail, healthcare, and home improvement loans.

The company is also expected to get into the auto loan business in 2021, which will no doubt boost its overall loan portfolio.

It's unreasonable to expect the type of growth Goeasy has put up over the last decade. However, there is a chance this company continues to be one of the faster growth companies in the space and continues to outperform the broader market.

Overall, we wouldn't worry about Goeasy hitting all time highs, it is still a strong opportunity

Investors get scared when purchasing stocks at all time highs. However, it's really important to understand that Goeasy Ltd was perennially undervalued by the market for years, trading in the single digit range in terms of price to earnings.

This recent surge isn't making the company trade at a premium, it's simply right in line with what we expected investors should be willing to pay considering its growth. In fact, we highlighted the company to Premium members back in 2018, and those who bought are now up over 400%.

Goeasy remains a strong option for Canadians today. However, we have identified another alternative lender in the space that is also consistently undervalued by the market despite outstanding growth. We truly feel it has the potential to become one of the leaders in the space over the next half decade.

If you're interested in finding out what it is, click here to upgrade to Premium and unlock market beating stock picks in seconds.

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Dylan Callaghan

About the author

Dylan is the co-founder of Stocktrades.ca and an avid self-directed investor. He holds a portfolio of Canadian growth and dividend growth stocks, and believes that anyone, regardless of financial status, stands to benefit from investing in the stock market. His ultimate goal with his writing and the continual development of Stocktrades.ca is to create a resource that helps Canadians, and investors from around the world, make more money and retire earlier.