A 300% gain from this alternative lender puts it on the plus side of the ledger.

Going Down Easy

GoEasy did well by me. I bought this stock at $24 back at the end of 2016. It took a little over 4 years, but in the end, the stock was a nice 4 bagger for me. Profits rose by 2.5 times over those 4 years and the p:e ratio climbed from 10 to 16. Nothing to complain about there.

Right now, GoEasy is doing very well. Loan loss provisions are way down as customers enjoy mortgage forbearance, government stimulus payments and loan insurance which pays their premiums for the first 6 months that they’re off work.

But all of this is temporary. The piper will have to be paid at some point and I’m not sure I still want to be around when that happens. The company reported record earnings in their latest quarter, and this has given a nice boost to the stock price, but if loan loss provisions had been at the same level as last year, then earnings would have simply matched last years’ results. If I take this reasoning a step further and assume that EPS are ultimately headed back to their pre-covid levels, as bad debt expenses climb back up, then I get earnings per share a shade under $6.00 and a p:e of around 16 at the current $96 share price.

You could argue that there is still room to run in this stock. After all, the average Canadian small cap is now trading at around 21 times pre-covid earnings. And GoEasy has had a much better run of growth  than your average company. Profits that more than double in 4 years typically deserve a premium p:e ratio, not a discounted one.

So I am perhaps taking my chips off the table too soon. I should maybe ride it out for another 4 years, hoping that their torrid pace of growth continues and that the market eventually rewards this company with an even higher p:e ratio.

But I worry that the next 4 years won’t be as smooth as the last 4 were. The company has come a long way, fast. At some point, I would expect some indigestion as they process all the new loans they’ve been doling out. As we move beyond the covid war-time measures the government has been implementing and we face the reality of re-building on the other side, and as the company is forced to explore new avenues to keep its pace of growth going, it may struggle to keep its profit margins up.

Financials often seem to be accorded a relatively low p:e ratio by the market. And that applies doubly to higher risk, sub-prime lenders like GoEasy. There is also always legislative risk out there on the horizon. These payday loan lenders walk around with a big target on their backs. And while I think this company offers a service that is clearly in demand, I do admit that owning it has always made me a little squeamish.

Taking everything into account (and factoring in a desire to keep taking risk off the table in a very effervescent market) I’ve decided to close the chapter on this book. It was a good read.

Full Disclosure: I do not own shares in GoEasy Financial.