Opinions
The Panic-Proof Portfolio (Stockchase Research)
goeasy
GSY-T
TOP PICK
Nov 14, 2024
Stock price when the opinion was issued
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Our PAST TOP PICK with GSY has triggered its stop at $165. To remain disciplined, we recommend covering the position at this time. Combined with our previous guidance, this will result in a net investment loss of 7%.
We do not really have a specific reason here. It has had no company news in more than a month. Investors may be shifting to other hotter sectors. Trump has made comments about capping interest rates. The last quarter was not a blow-out. It's been more than a year since the last dividend hike. There is a CEO transition. At less than 10X earnings, we are not particularly concerned here. The company has adapted and thrived in all sorts of challenges and economic backdrops. We think 'now' is attractive, and at $150 (close to its prior low) very attractive.
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Current valuation finally lets him present it as a Top Pick idea. Expanding into credit cards. Sold off last year on CEO stepping down, but former (and excellent) CEO is helping in the interim. Balance sheet in great shape. Grows 20% a year, year in and year out. Trades at 7x PE, almost a distressed multiple, great entry point. Yield is 2.7%.
(Analysts’ price target is $235.53)
Wonderful company. Fantastic operator, very good risk manager. Delinquencies on credit cards, rising bankruptcies, and overall economy suggest more credit defaults. This will hit the non-prime customers of GSY more. But that could be your opportunity to enter the stock, as it'll benefit on the other side when the economy starts to expand.
See comments on Propel Holdings, too. This stock has done well over time, but investors have been selling this recently. The new CEO has 20 years' experience in retail banking, very good. The valuation is cheaper now, while the dividend has been there a long time and continue to raise it. Good long term, but one day he thinks some company will buy it out.
50% of its business is non-prime, unsecured lending. Great job helping people to restore their credit. Can reprice loans pretty quickly, in a matter of 2-3 quarters -- and that explains why they haven't had big losses over the years. This ability also reduces their exposure in an economic downturn. Banks are now turning away borrowers, and GSY can pick them up.
Tremendous compounder. Has faith they'll get through this. The misconceptions on credit are creating a volatile stock price.
Still likes it. Now expanding into credit cards. Over last 10 years, EPS has gone from $2 to $20. Returned 25% annually to investors over time, including dividends. One of the best-performing stocks in Canada. Volatile name, and you have to have the stomach to hold it through the cycle. Extremely cheap at 7x PE.
Whenever people get worried about the economy, they tend to get worried about the non-prime lenders because of unemployment spiking. But when you get into a tough economy, that's actually the best time to buy these names. Banks tighten credit, and better-quality borrowers slip down to lenders like GSY.
Following recently released earnings showing a 26% increase in operating earnings and a 16% increase in loan originations, we reiterate the leader in Canadian sub-prime loans as a TOP PICK. It currently trades at 11x earnings, 2.5x book value and supports a 25% ROE. We note that their debt is rising modestly, so we recommend trailing up the stop (from $150) to $165, looking to achieve $235 -- upside potential over 30%. Yield 2.5%
(Analysts’ price target is $235.56)