The Canadian Investor - GoEasy Shares Sink After Short Report. Should Investors Be Worried?

Episode Date: September 25, 2025

In this episode, we break down Constellation Software’s recent AI focused investor call. What management actually said and how it could shape M&A and vertical markets. We then do a deep dive into the new short report that was published on the subprime lender GoEasy with a balanced look at the key allegations, the numbers (interest receivable, charge-offs, delinquencies), and what to watch next. Tickers of stocks discussed: CSU.TO, GSY.TO Check out our portfolio by going to Jointci.com Our Website Our New Youtube Channel! Canadian Investor Podcast Network Twitter: @cdn_investing Simon’s twitter: @Fiat_Iceberg Braden’s twitter: @BradoCapital Dan’s Twitter: @stocktrades_ca Want to learn more about Real Estate Investing? Check out the Canadian Real Estate Investor Podcast! Apple Podcast - The Canadian Real Estate Investor  Spotify - The Canadian Real Estate Investor  Web player - The Canadian Real Estate Investor Asset Allocation ETFs | BMO Global Asset Management Sign up for Fiscal.ai for free to get easy access to global stock coverage and powerful AI investing tools. Register for EQ Bank, the seamless digital banking experience with better rates and no nonsense.See omnystudio.com/listener for privacy information.

In this kind of market, I like having some cash on the sidelines. It gives me the flexibility to jump on opportunities when the right stock goes on sale. But just because the cash is waiting, it doesn't mean it shouldn't be working for me. That's why I use EQ Bank. They offer some of the best interest rate among Canadian banks, so my money is still earning while I wait. You can even get a boosted rate by setting up direct deposit for your payroll and depositing $2,000 or more per month into your EQ Bank account.

account. Your cash stays liquid and ready to go when it's time to invest. And if you're not in a rush to access your funds, EQBanks noticed savings accounts and GICs are great ways to grow your returns even more. It's a smarter way to park your cash. Visit EQBank.ca to learn more and keep your money earning even while you wait. Investing is simple, but don't confuse that with thinking it's easy. is not just a ticker. At the end of the day, you have to remember that it's a business. Just my reminder to people who own cyclicals, don't be surprised when there's a cycle. If there's uncertainty in the markets, there's going to be some great opportunities for investors. This has to be one of the biggest quarters I've seen from this company in quite some time.

Welcome to the Canadian Investor Podcast. We're back for another episode. What we'll do today is kind of of a news episode, but news slash a little bit deeper dive. So we're going to be talking about Constellation Software. They had a conference call addressing AI and the impact of AI on their business. I think a lot of people were looking for that. And I know it's a widely held stock for our listeners here. So you'll go over that. And then we'll get to the meat of this episode with GoEasy having to deal with a short report. So we'll go over the short report. We'll a pretty balanced take, I think, our opinion on it as well. We'll give the perspective of the short, but also from the company.

And I think it'll be a pretty good episode because it was definitely a juicy short report to say the least. They always are, but this one was, I don't know about you. I had fun digging into it. Yeah, like a lot of them, I mean, we've had quite a few of these over the last while. I mean, you can think of like Dollarama was one, Shopify, Lightspeed. like most of them they're pretty tough to read pretty convoluted and this one kind of is too but this one also like gets right to the point and it's got kind of a core focus that it was much easier to digest I guess and I mean it has some products you know some some attributes that

pretty much every short report has like a lot of unverifiable information a lot of you know disgruntled former employees and managers that are making comments remaining anonymous. So it's got a lot of the things that most short reports have. But I did find it interesting, much more interesting than ones that have happened in the past. Yeah. So let's get started. Let's start off with Constellation, that conference call. So you want to break that down for us, and then I'll chime in a little bit and give my take as well here. Yeah. So they kind of, I wouldn't say they made this on an emergency basis, but there was a lot of shareholders that were requesting that they kind of come out and do a conference call because this company does not hold calls very often they just do

annual so they kind of made this out of the norm at the request of shareholders and i mean if you're somebody who just kind of expected them to say whether or not AI is going to disrupt their business i mean you're probably going to come out of this empty handed because realistically they just say they don't know and that's that's the honest answer so i think a lot of people who were kind of hoping that the information would be more definitive. It definitely wasn't, but they did provide a lot of insights on the call. I mean, they go, you know, in some areas of the call, they go very in depth. I mean, even me, I was reading it. I was kind of struggling to, to understand what they were even talking about. And I'm an owner of this company. I'm definitely not like a diehard of this company. I know

the core of what it does, but they go quite a bit in depth. But the first comment they made, so kind of to kick off the call, they mentioned in 2016, Jeff, hint and I have I have no idea who this guy is but he is titled the godfather of AI he had mentioned that people should stop training radiologists because he mentioned that they would be largely replaced by AI so they mentioned this story because since his comments radiologists have grown at a 17% pace annually which has actually outpaced the actual population growth in the US so they're kind of saying like you know one of the smartest guys that in this space expected a industry to be completely replaced by AI and it not only was not

replaced. It's actually thrived. And they had mentioned that AI has had a gigantic impact on radiology, but more so from the quality of treatment side, not the human replacement side. So Leonard also stated he's kind of unsure as to whether programming is going to go through a renaissance or a recession. Same thing. I mean, this is why, you know, if you wanted a definitive answer. You're not really going to find it. The company also did mention that there's unlikely to be any sort of constellation level metric in terms of progression of AI a constellation. Like a lot of people had asked, like, are you going to have a piece of data that you're reporting on that kind of shows us your progress? They do mention there'll be a lot of individual

use cases and individual results for particular businesses it owns, but it'll be a while before it can kind of report on a grand scale. Yeah, it sounds like they're letting like all the different businesses they own kind of trial and error, how AI can apply to their business. And from what I've read and I did not listen to the call, but I read the transcript. And from what I've read,

they also seem to say like, look, sure, maybe we would get more efficiencies if we did something enterprise-wide, but using the approach you're using, will allow each business to properly use it and find the best use cases for their own business. Yeah, yeah, they did. And they went on another interesting thing they went on to say. They mentioned a few times that a lot of the AI tools that are coming out,

and I would fully agree on this statement, they are solutions in search of a problem. That was kind of what they said quote on quote. Like people are making these, a lot of these companies, you know, instead of starting with an actual. pain point for a customer they're instead doing the reverse they're coming up with a product and then just trying to jam it into some particular area where it has a use case and they actually mentioned they did try this with one of their major business units i can't remember what exactly they had mentioned what it was

for it was for some of their one of their businesses to be able to access data quickly so they said the software worked absolutely perfectly but nobody used it because again they were they were creating a solution where there wasn't really a problem and they they do mention that this is kind of a situation in the space right now just because I mean you can slap AI on anything and it just has a huge draw just because it's AI yeah yeah and I mean it's funny because on the weekend I went to one of my friends 40th birthday in Montreal cannot remember last time I drank that much I feel like I'm still I'm still feeling it but one of his brothers was talking to me and he works for the federal government in translation and they're

actually implementing AI tools and it's interesting the reluctance that some oftentimes older employees will have about using those AI tools and a lot of them feel like their job is being threatened but you know the reality is is translation is a pretty good application for AI tools of course like anything I've seen those tools in action I speak French and they're pretty they're quite good but oftentimes like you still need to revise a little bit and I think you're seeing more and more employees embracing them but you're also seeing some resistance I was just a little anecdote I don't know how much it relates to consolation here but it's just interesting how the implementation in more maybe legacy businesses how much it can change

but also some of the reluctance from the employees to actually adopt those tools. And I would say learn AI. So if you're in a type of work and you think AI will have a place, make sure you do the work to start learning how to use it. Because those who actually learn and know how to get more productive with these tools, I think we'll have a big edge versus those who are resisting the change, especially when it's something that can really help productivity. well and that's kind of exactly what they go over on the call so one of the analysts spoke about

the difficulties in being able to code with AI but where they mention it really struggles is with debugging so they kind of went on to mention that most of their the efficiencies they're seeing thus far are kind of you know around automating to a certain degree like unit testing vulnerability traffic etc but then they kind of then go on to mention that a lot of the systems they have are written with tens of millions of lines of code and they mentioned that AI really struggles in that regard and because you know these LLMs they had mentioned definitely perform better when it comes to writing new lines of code but they struggle when it comes to troubleshooting or finding issues in say existing code basis and they kind of mentioned that it's probably because a lot

of these LLMs are built off publicly available data so for coding it would just be some sort of open repository that they're using to kind of pull it. So they kind of mention, you know, regardless of whether or not a piece of code has been written by AI or a human, the maintenance and debugging standpoint is kind of at the same point right now. They haven't really changed. So they kind of mentioned an example of they could easily just take AI, increase coding productivity by like 10x because of AI being able to write the code. But then, you know, if they send it to the client, it has a whole bunch of bugs the product productivity benefit

might actually be clawed back because there's a lot more maintenance in terms of managing that code debugging that code so coding is one I mean I've even seen this on like very very simple like web coding I mean we don't need to hire a developer anymore

we just utilize chat GPT it'll spit out the code we need to insert and the job is done fairly easily so that is one area that I do expect to be disrupted but Constellation kind of comes back at this and says, yes, the new code, but the debugging and just maintenance of existing code is where it's kind of, you know, still struggling right now.

Yeah, and it will likely get better. I think that's something we have to keep in mind is some of the issues, obviously, if you're looking at LLM, it's improved a lot since the first chat GPT came out. So I think it's always something you need to remember there. Yeah. Do you keep hearing about these all-on-one ETFs lately? Well, I have some exciting news.

BMO ETFs just cut the fees on their flagship all-in-one ETFs to 0.15%, making them one of the lowest cost options in Canada. That's right, more value, same smart diversification, all in a single ETF. Whether you're just starting out or simplifying your portfolio, BMO all-in-one ETFs make it easy to invest with confidence. Just Zed it and forget it. Considering ETFs like ZEQT, BMO's all equity ETF, or ZZGRO, BMO's growth ETF. Calling all DIY, do it yourself for investors, Blossom is an essential app for you. It has been blowing up with now more than 50,000 Canadians plus and growing who are using the app.

Every time I go on there, I am shocked. The engagement is amazing. This is a really vibrant community that they're building. And people share their portfolios, their trades, their investment ideas in real time. And it's all built on the concept of transparency because brokerage accounts are linked. And then once you link your brokerage account, you can get in-depth portfolio insights, track your dividends. And there's other stuff like learning duolingo style education lessons that are completely free. You can search up Blossom Social in the App Store and join the community today.

I'm on there. I encourage you go on there and follow me, search me up, some of the YouTubers and influencers and podcasters that you might know. I bet you they're already on there. People are just on there talking, sharing their investment ideas, and using the analytics tools. So go ahead, blossom social in the app store, and I'll see you there. So probably the next part I'll go over to is kind of the M&A front, like the acquisition.

they ask consolation if they should increase their discount rate because of the uncertainty in AI. And, you know, in the simplest explanation possible, a discount rate is how investors or companies value future cash flows today. So today is worth $100, but $100 five years down the line kind of has to be discounted back to what it's worth today because obviously you would rather take $100 today than $100 five years from now. So the higher the discount rate, the less the future cash flows are worth. So you utilize a higher discount rate when you're when you're being more conservative. Constellation mentioned that they already run a very conservative discount rate so they won't be changing it. The one thing they did mention they will do is kind of adjust

their risk of failure in their modeling. So they kind of mention if they have a 10% failure rate tacked onto an acquisition, they might they might bump it up to 20. I mean, they didn't, I don't think they actually said these exact numbers, but I'm just saying like that's kind of what they're assuming here. And they're adding, they're adding like a margin of safety. Exactly. Yeah. Yeah. So they also mentioned the only industry they're actually adjusting their acquisition models to thus far is the customer support software segment. Nothing else has seen AI risks affect pricing all that much. And what else do I have here? What else was in here? And they mentioned that AI has the ability to help Constellation build out solutions to their clients more efficient.

But they kind of also acknowledge the risk that it does allow those clients to kind of utilize AI to do it themselves. So they say this tension will not go away. There will always be companies who kind of say let's give this a go in regards to trying it themselves. But on the flip side, it could also allow competitors to come in and provide a much cheaper solution if the company is not willing to build it in-house. So I think that is also something to consider. Yeah, definitely. And they they kind of mentioned on the flip side of this, though, that it shouldn't really be underestimated how complex the systems are. And even with AI, it does require an exceptional amount of skill to develop and maintain. They kind of mentioned, you know, as long as Constellation maintains strong relationships with clients, it should be able to navigate the situation and kind of give them what they want. And the final question of the call, the M&A strategy was brought up again. And obviously with all this AI coming out, they've kind of been a bit prudent in terms of acquisitions and they do mention no doubt they'll have to expand beyond vertical market they said they've been looking into and have made acquisitions in the horizontal

market however they mentioned that AI at least thus far is not really changing what they're looking for in the M&A world much at all and on a final note he Leonard kind of mentioned that people should be approaching AI with a high degree of skepticism I mean just make sure you're fact checking you know if people are reporting gains through particular pieces of AI software companies to kind of verify that they're actually driving that growth through that system and I think he had mentioned something I didn't actually look into this but he had mentioned some sort of soft drink company that said they were reporting nearly double digit increases in sales due to AI I mean I don't I don't really know like that's kind of what he said in regards to skepticism but yeah that was

kind of the the gist of the call there wasn't a lot here from a perspective of people kind of looking for near-term certainty they didn't give that whatsoever that reassurance i mean i think it's good because they're that's why and i don't own consolation i know you're a shareholder but i don't own it but what a lot of people won't it have told me in the past is they're they love their honesty and the transparency and it sounds like for me what i read from this transcript is that They're just not sure what kind of impact it will have medium long term. And the way I would view that as an investor is just it increases the divergence in terms of outcome that you could see with consolation. So there are more downside risk, but there's also more potential upside due to AI.

So I think that's how I would approach it. I'm sure we'll get some negative comments because as soon as you say something that's not the most flattering with consolation software. you get people that get pissed off at you. We've seen that before, which, I mean, makes me realize that maybe they should seek sometimes a bit other opinions than just getting into this echo chamber, but that's a discussion for another day.

That's the way I see it is because I saw a lot of people on, on X or Twitter just posting like, oh, every time it's gone down 20%, it's crushed and has been like a great long-term performer and could definitely happen. but you have to keep in mind that consolation whenever those things happen was a much smaller company on the one hand where now acquisitions will need to be larger to move the needle or there's going to have to be a higher volume of smaller acquisitions which can be harder to do and there's that additional risk of

AI or potential benefits so I think you have to just factor that in into that investment thesis versus just saying anytime you've bought it in a 20% drawdown in the past you've had tremendous this return. Well, AI wasn't there when those things happen. So I think you just have to make sure that you're looking at all the different potential outcomes and then you decide whether it makes sense to invest or not. But I always get annoyed when people just like look at, oh, see what happened in the last 20, 30 years. It's going to repeat itself. Not necessarily. Yeah, it's never a guarantee whatsoever. The one thing, though, like Constellation, it's actually going through and this is crazy to say because it's been it's a tech company publicly traded for

20 years now a little less than 20 years i think they're going on just under two decades like it's max drawdown according to to why charts at least is only like 25 percent so we're we're getting close to one of the biggest drawdowns that the company is ever witnessed and the one thing i will say about this call is you like they like a lot of people would probably appreciate the way they approached this call. They definitely could have approached it a different way and probably sent the stock up. You know what I mean? They could have said some things differently, kind of a bit more bullish on that regard and probably sent the stock up. But they're just brutally honest, which is definitely what you want from a management team for sure. Yeah. No, definitely. And I think

that's a great thing about consolation. So I think let's wrap it up here because we do have quite a bit of things to talk about. And I'm just sharing here before we wrap it up by consolation. just to show here the drawdown. So about 21% drawdown. So definitely not something that happens very frequently to say the least for consolation software. So let's move and go over that GoEasy short report that definitely there's been a lot of talk on Twitter about it,

a lot of investors. I'm sure there's a lot of listeners that actually own this company. So we'll do our best to go over some of the main allegations or response from GoEZ and some of the things that maybe don't have that much merit or are hard to verify and some other more concerning points in that short report. So I'll get started. I know you'll have some things to chime in here. So the first thing that the short report said was investors thing that go easy has some sort of secret underwriting sauce for a loan, which allows it to have lower net charge off

well below industry peers and charge-offs are basically when you write off a loan but there's usually delinquency so loans people start not making the payments so the loan is considered delinquents there's you know 30 60 90 180 days delinquent typically and you see that with any kind of lender and then when there's a charge-off it's usually when there is part or the full loan is not being recovered so they just charge that off it they take the hit and go easy is under 10% for that charge off rate, that net charge off rate, while industry peers are sitting closer to 15%. And they say that it is because of creative accounting in regards to how they classify delinquencies and net charge off. They also allege that there should be a higher percentage

of loan that should be classified as delinquent and not current. And you can go a bit more in detail. I know you have a personal story on that as well as some of the things that there are alleging that GoEasy is doing here to classify a loan as current, meaning that the borrower is actually making the payment on a regular basis versus delinquent where the borrower has stopped paying. Yeah, so pretty much the gist of it is they, so if you're in, you take a loan, I would go easy. If you get into a bit of trouble with that loan, they'll have you, they'll set you up so that you can skip payments. So you can skip payments four times a year.

So you go to the company, you say you can't pay. They'll skip it. They still keep the loan current. Outside of this, you can make, I believe it's 51% of your monthly payment, and they'll still kind of consider this a current loan, even though you haven't paid the full amount. And you can also do this four times a year. And that is kind of separate from your skips.

So you can combine this together. So in theory. Can you remind me that's what the short report is alleging, right? Yes. Not necessarily what they're doing in practice. Yeah. So this is kind of what the short report is alleging. And I do know, and I'll say that the experience, I do know that skip payment exists because when I had my rental condo, I had a tenant that had gotten into a bit of trouble with GoEasy. And this is crazy too because they go easy, absolutely.

me like the landlord for this they're like they wanted to know where they were like if they're still living there like where they were like they they have this situation with go easy that they want to resolve and things like that obviously they can't tell me any personal details but anyways i got a hold of the tenant and yeah they they they kind of spoke about how they they had they kind of utilized these what do they call them borrower assistance effectively programs to kind of keep things in check. So you can skip four payments a year. You can pay 51% of the loan four times a year. And then there's even a situation where, and this kind of came down from a former Go Easy employee in the report, obviously anonymous. I take all these with a

massive, massive grain assault. There's a lot of things in this report that will either come from anonymous former employees or they will come from competitors, both of which have kind of a vested interest to maybe not say the best things about Go Easy, but they say that once, if you have trouble with a loan, they can effectively rewrite the loan after a year. So let's say you are really struggling with this loan throughout the course of a year. Go Easy will relieve the interest you owed in that year. They'll rewrite the loan and you'll start off from scratch. So these three ways are ways that these subprime lenders can keep loans current. So, there was one situation in the short report where the company of shorting it asks that

former manager so in theory if I have somebody who is struggling to pay a loan how long could they possibly kick the can down the road until they have to mark the loan as delinquent and the manager actually said two years so there's so many like borrower assistance programs that they could get down to two years and they had actually mentioned that There's actually situations where he's seen it where delinquent borrowers who are clearly struggling to make the payments have actually had their loan modified, whatever it may be, for upwards of three years, depending if, you know, Go Easy kind of still thinks they can, they can recover that money. Now, the other thing. Keep in mind, two years is 730 days. It's not 180.

So it's a far cry from that 180. Yeah. And that's, yeah, that's the main thing here is they're keeping. Well, I guess we should kind of make a caveat here that this is all assumptions from the short record. Exactly. Yeah, yeah. They're alleging this. They're alleging, yeah. And I think just one thing I wanted to mention is, I think just based on your anecdote, like I think there's good reason to believe that they're probably doing something to that effect,

trying to accommodate boroughs so they can keep the loan currents. And of course, the more current the loans are, the les die of delinquiry. ratios will be and the net charge offs will look better. So it is to their advantage doing that. So I think it's it's also something that we were talking before this that seems to be pretty prevalent in this industry for subprime lending. So I think it's really important to just place that caveat here. But at the same time, it is one thing to do this when the economy is doing well. It's another thing when employment starts rolling over because when do people stop making their loan payments, whether they're good or not good borrowers. It's typically when there's a loss

of income. So when they lose their job, for example, and if you have someone skipping payments like this, I would venture to say that there's a good chance, probably at least 50% chance, that that loan will eventually end up as a write-off. So that's just my two cents here. just logically I think that makes a whole lot of sense well they had mentioned like the the manager had mentioned again in this report like those people who kind of get kicked down the line multiple years he he had said that again like grain assault but he had said that 80% of them eventually they just go bankrupt or the or the loan gets charged off one of the two the people who get in a lot of trouble like are truly utilizing every type of assistance program they have and when you

when you first read this report, you'll probably read this type of stuff and be like, wow, like, this is crazy. But this is like a lot of, I kind of, and even when I first read this, I was like, holy, I did not realize they were doing this. And then I kind of looked into the subprime lender industry overall. Like pretty much every company does this.

The short report kind of frames that as if go easy is the only company doing this. They're not like, these subprime lenders, like there is people, don't get me wrong, there's people who have gotten into a bit of trouble credit-wise and are trying to repair their credit, but a large chunk of the loan portfolio at GoEasy will be terrible borrowers and terrible borrowers tend to miss payments. They tend to skip payments, things like that. So

these assistance programs are put in place to lower the chance of default. But the thing that is not clear, the thing that I couldn't find is if somebody like another alternative lending, is doing what GoEasy is accused of doing and is keeping these loans current. Like, I don't know if they're going delinquent on these borrowers' assistance. Like, say, we go past 90 days and they're still in borrowers' assistance, and they go delinquent. They mark the loan as delinquent, whereas GoEasy is accused of keeping it current. And there was a segment in this report.

I'm kind of trying to find it right now because it's a lot of. But effectively, go easy. So back in 2023, their definition of a delinquent loan. So they say unsecured consumer loan balances that are delinquent greater than 90 days. And secured consumer loan balances that are delinquent for greater than 180 days are written off against the allowance for loan losses. And then they kind of highlight again in the 2024 report, they say the exact same thing. But after the 180 days, they put in there where no further collection measures are. are deemed practicable, are then written off against allowances for loan losses.

So this is where the report kind of says that they've changed their definition of a delinquent loan to the point where these borrower assistance programs can leave the loan current. And I think GoEasy did comment on this, and they said that they're doing this because of their auto loans. Like, I think that's why they changed the definition of a charge off because they feel, yeah, go ahead. Yeah, we'll get into that because there's also been the PR side that's been a bit of a head scratcher here. Do you keep hearing about these all-on-one ETFs lately? Well, I have some exciting news.

BMO ETFs just cut the fees on their flagship all-in-one ETFs to 0.15%, making them one of the lowest cost options in Canada. That's right, more value, same smart diversification, all in a single. ETF. Whether you're just starting out or simplifying your portfolio, BMO all in one ETFs make it easy to invest with confidence. Just ZD it and forget it. Considering ETFs like ZEQT, BMO's all equity ETF, or ZGRO, BMO's growth ETF. Calling all DIY, do-it-yourself investors, Blossom is an essential app for you. It has been blowing up with now more than 50,000 Canadians plus and growing who are using the app. Every time I go on there, I am shocked. The engagement is amazing. This is a really vibrant

community that they're building. And people share their portfolios, their trades, their investment ideas in real time. And it's all built on the concept of transparency because brokerage accounts are linked. And then once you link your brokerage account, you can get in-depth portfolio insights, track your dividends. And there's other stuff for you. like learning duolingo style education lessons that are completely free. You can search up Blossom Social in the app store and join the community today. I'm on there. I encourage you go on there and follow me. Search me up. Some of the YouTubers and influencers and podcasters that you might know, I bet you they're already on there. People are just on there talking, sharing their investment ideas,

and using the analytics tools. So go ahead, blossom social in the app store and I'll see you there. let's move on to the part here that is easily verifiable and that is frankly quite concerning yes so this i took straight out of the financial statements so for those that are just listening not watching the video that's fine i'll describe what it is so essentially it looks at the gross loans in terms of and compares those with the interest receivable so interest receivable essentially what it means is it goes on the balance sheet as an asset and it's the amount of interest that they've accrued on the loan from a borrower but the borrower actually hasn't paid yet so basically you can probably two plus two equals four you can make that when it's that situation there's probably a high

proportion of these interest receivable where the borr is at some stage of delinquency of course there could be a timing issue depending on when the payment is due and all the that stuff. But what's really concerning, if you go back to 2020, the percentage of gross loans that were in interest receivable, it was around 1%. So 2020 to 2023, around 1% range of 1% to 1.33. And then you see that jump to 2.09% 24 and 2.58% 2025. And it's even more start when you start looking at interest income compared to interest receivable. So the reason why that's important is interest income actually goes straight to, well, I mean, it's an income, right? So it goes on your income statement and it will, of course, help your earnings and your earnings per share.

What Bay Street and Wall Street kind of focus on during earnings season. So the way accounting works is they classify that as interest income, even though they may not have received that payment just yet. and what you start seeing here is that there's the interest receivable compared to the interest income as also ballooned much faster than the interest income so back in 2020 2020 to 2023 again that's kind of more than normal years or you're looking at a range between 14 to 17 percent the interest receivable compared the interest income and then in balloons to 35 percent in 24 and then 42% in 2025. And I use data from Q2 of each year just to make sure it was kind of a year and year basis just to compare here. And that is one of the most concerning things that the

reports highlights. And that is very easily verifiable. And one thing that's concerning is, and we can talk about that either now or a bit later, is go easy hasn't really commented. on that and they their PR has been let's say a little bit concerning in terms of the messaging but maybe we'll get that a bit further on because just finishing as to what the rest of the short report says here yeah this is this is was probably the most alarming to me I mean well I know we had initially talked about it and I was like okay interest rates went up like maybe they have some fixed income or something that's you know earning more but they haven't got it yet but and even then even if that was the case apparently this the interest receivable here is only from their from their loan

book so yeah yeah for for lenders it would typically they would classify that just from their loans but even if i so i dug in after we were talking about that i went into their financials and they actually they have some investments but they're just investment in businesses on the balance sheet and they have a little bit of cash and that generates interest but it's like it's peanuts compared to the interest receivable so even if it worked to be included in that it would not make a material difference yeah so the the kind of main thing pulling this all together and what the short report is saying is you're seeing this balloon because of those skip kicking the can the skip payments the you know partial month payments the rewriting of all those loans etc and eventually as you had mentioned this interest income goes on the

income statement but eventually if they do not collect this receivable it gets charged off and it will ultimately hit earnings so that's kind of the theory here and i mean to see it grow this much i mean it's it's pretty much five-xed it's gross loans you could say over the last five years but it's interest receivable as like eight-exed nine-xed oh yeah so there's there's definitely a a big deviance there yeah exactly and yeah i think you said that best is that the problem is you're kind of pulling forward potentially this interest income on your earnings result and this could eventually show up into higher delinquencies and higher charge-offs. Obviously, the charge-offs come after a loan is delinquent. So one comes first and the next. One of the other key things that

they allege is that go easy as pause or buy bags because of high debt levels, not because of its stock being highly valued. I think that is, I mean, debate. So I think you can it's fine. I just wouldn't put too much weight in there. It's a bit like the former employees, right? Like you kind of are careful a little bit with those kind of statements here. They could have various reasons. The last one that I don't place too much stock in. It could be related. Like it could not be. I can give you some arguments is there's CFO left on short notice recently and the longtime CEO left earlier this year. They think it's because they they saw the writing on the wall. and this will come up in the next year or two and they'll have to explain it and they're just leaving to ensure that they don't have to do that. Again, could be true, could not be true. It's just, it's definitely hard to like put that much weight into that alone.

But that is kind of the main allegations. Anything that I missed here or no? No, I mean, I guess if we go on to like kind of the PR side of things you want to get into that the first thing i guess the first thing i'll say is you have that verifiable piece of information like probably one of the only ones out of this whole report and that is you know the the receivables ballooning and then kind of go easy came out with a statement today saying effectively they they really said nothing i mean they said that they'll they kind of put a number yeah they put a number in terms of allowances which

is completely irrelevant. You should more so be talking about the percentage against, you know, total loans. I think what did they throw out, like 400 million or something in provisions or something like that? Yeah, exactly. So I'll just show this for our joint TCI subscribers here. So you'll see, I mean, it's a whole lot of nothing if you ask me. The first portion, I won't even read it. It's just this like kind of generic stuff. The second portion here, a little bit more substance, but not all that much. I'll just read just part of it. For decades, GoE's as delivered profitable growth, exercise, discipline, risk management, and provided transparent financial reporting consistent with industry standards. And I'll just skip the rest here. The company currently

has a provision for future loan losses of 400 million on its balance sheet. The provision has already been expensed through the income statement and resides on a balance sheet to absorb future losses already in the first half of the year the company has received net principal payment for its customers in excess of 600 million and generated revenue of 810 million which together demonstrate the quality and health of our loan portfolio so that doesn't address anything at all so and what is a bit concerning here is that came out this morning so about 48 hours and they reference my sense here is they just threw big numbers to try and appease retail investors and the reason why we say retail investors this is a small cap company

about three billion in market cap large institutions are not investing in this company because it's just too small it's just too small so it's either a retail investor or small cap funds for the most part and maybe some financial type of funds and the 400 million may look a lot like this but the problem this is like around 8% of their gross loan portfolio and if you compare the other company i decided to compare it to u.s company it's called one main holdings also has car loans secured loans to cars in their portfolio and their allowance for credit losses is 11.5% so just to give you an idea so actually here and obviously the business won't be exactly the same but i just wanted to mentioned that to just provide some context as to why like it's it's much lower like 8% 11.5

percent like this is a significant different in percentage for loan losses on the balance sheet and I find it a bit misleading that they just threw out there that number because it's not wrong in itself I checked their balance sheet and they're correct I think it's to be precise it's 403 million so they actually downgraded it by a couple million here but the other concerning part and we were talking about this is the day the short report came out after hours, they held a close call with sell side analysts to basically, we don't fully know what was discussed on the call because it was just sell side analysts. But the reason that's concerning is sell side analysts are notoriously bullish when it comes to company.

Like they typically won't downgrade a stock unless there's like a really good reason. And it'll never be like sell. It'll always be neutral or buy. And you had someone from National Bank that went, I guess, spoke to the Globe and Mail. And you had an analyst from Scotia as well. And National Bank basically said, oh, it's because of strong growth in car loans. Everything seems to be fine. I'm just paraphrasing here.

It's a nothing burger for them. They think it's almost a hit piece. I'm just kind of verbalizing here. And it would be a buy. Scotia Bank was a nothing. a little more critical, but not really on the business, just saying that this short report will have a overhang on to stock and the company will have to deliver in upcoming quarters to make sure that this kind of fades away. But the issue with this is almost feels like, and I'm giving

them the benefit of doubt, but my perception is that they're trying to get the sell side analysts that oftentimes have career risk for being critical about companies because would you invite an analyst on your call, if they're known as someone being adversarial or someone that's kind of bearish on company, of course you won't. So they definitely have career risk of being too critical. It's kind of the opposite of the short report where the short report obviously has a vested interest in getting the stock down because they'll make money because they're shorting the stock. And then you come out two days later and you pose this very generic response on your website it almost feels like they're trying to get the sell side to do the bidding for them

and it is very concerning that they provided this amount of detail because clearly they provided some more detail to the sell side analyst a close call then you get the cell side that goes on globe and mail and says what they say you mean people can look it up i think it's tuesdays the biggest movers or stuff like that and then they come out with this it just it does not look good It could just be bad PR decisions, but it just doesn't look good for retail investors here. No, I don't think so at all. I mean, you would probably have to go deep into the vault of episodes, but we did an episode on sell side analysts and how, like, the industry is plagued, I guess I would say.

Like, in my view, why you would do this is you kind of want a bunch of softball questions because that is what sell side analysts do. I mean, obviously they have a lot of vested interest in investment banking and all that type of stuff for these companies. So you're never going to get a sell side analyst onto a call that's going to be overly critical. So they did this. And I know they went much more in depth on that call because I think there was a report

by Desjardin, like an analyst that was on the call. And they go in depth as to what, you know, why they didn't think it was necessarily all that big of an issue. But the fact is, is like, Go Easy was talking about this with the sell side, but retail, they just kind of show their revenue, their provisions, and the fact they are going to hit their guidance. And the thing about the guidance is, is this short report isn't really suggesting anything immediate. It's more so suggesting that they're kicking the can down the road a year from now, two years from now, and eventually all these delinquencies are going to pop up. So, I mean, of course you're going to be hitting your near-term

guidance. They don't really mention anything about the near term. Like, you're going to be able to book all that interest income if you keep kicking those, you know, loans down the road and still keeping them current. So, yeah, I don't know. The response was, it was very generic. It was just kind of boilerplate, in my opinion. And I'm glad. And let's throw some big numbers out there. Yeah. And I had made, uh, I made a YouTube video on the report yesterday. And I didn't want to make a video until I got a response from GoEasy because I thought there would actually be some value in there but there was none

so I'm kind of glad I put one out yesterday yeah no exactly and aside from that there's just a couple of things and that's outside of the short report and I wanted to mention here so what I'm showing is the most recent investor deck from their Q2 earnings

and it's just a bit of a head scratcher and I'll explain why here and it is something I think I had mentioned I was kind of surprised when we last did the earnings, that things were looking like so good for them. So you have a slide, so I believe it's slide 18 or 19 on their slide deck so people can follow around if they want to their investor presentation. And you have net charge off that are actually declining. So in the last five quarters, it went from 9.3% to 8.8%. So year over year, I guess it would have been 50 basis

points lower, which is pretty impressive. And then you have total delinquency going from from 7.7% all the way down to 6.7%. Now people will say, okay, well, maybe they're doing better, they're underwriting, okay, that's definitely a sensible argument. But then you start thinking about the macro backdrop. And unemployment in Canada has increased by 0.5 percentage points. So that's a pretty sharp increase since the beginning of this year. So you have that participation rate is getting lower.

So you have more and more people giving up on trying fine jobs, which is not good either. And yet, despite this, and actually GDP is also struggling, but let's talk more about employment because that's really what affects a lender. When you factor that in, to see these kinds of amazing results, for me it's just a head scratch. I'm not saying that they're doing anything wrong here. I'm just saying in this kind of macro backdrop, and that's why I've been so bearish on this company even before the short report was, I just don't know how well they'll do in this kind of environment. I, of course, I know they were around for the great financial crisis,

but it's typically not the companies you want to be owning when the economy and employment starts rolling over. You want to start owning them when things start bicking back up. That's really, and there's been a significant drawdown because obviously losses have increased because there's more and more loans that become delinquent and then there's higher charge off. So that is something that to me, nothing is answered where I saw the sell side analysts, clearly with the company and their news release that did not answer anything. But that is something that to me is a bit of a head scratch.

It just does not make logical sense. Yeah, I mean, I think if you were to ask most people, if you were to get most people to predict how many people were 90 days past due, six out of 100 would be, I don't know if anybody would guess that. I mean, I would guess the number would be much higher. And it all comes down again to that, you know, their definition of delinquent. So whether or not that is true is the really uncertain thing about the short report, which is what they kind of tried to benefit on, because I don't really blame Go Easy. And we had chatted about this before. I don't really blame GoEasy for coming out, like for coming out and saying,

like oh you know yeah we do this we allow people to defer payments skip payments rewrite their loans like because a lot of people probably don't even understand that this is happening to a certain degree so i don't blame them for not coming out and saying that but i probably wouldn't have minded a better picture as to how those delinquency rates like kind of their reframing of the delinquency rate in the annual report to kind of say like just say that yeah we keep loans current if they're going through borrowers assistance, whether or not people would like that or not, whether that would spook investors, I don't know. So I mean, I don't know. I kind of probably would have liked that clarity to a certain degree. But I mean, the other thing that I'm seeing, and this is mostly

like, I don't know, from a very small sample, but a lot of people are talking about like the secured loan portfolio and how like it's not a big deal because like half of the loan portfolio is secured. I mean, these in the event, like, let's say all of this was true. There's a bunch of delinquencies in two years. A lot of people are kind of shrugging this off because half the loan portfolio is secured. Like, these banks are not in the business to repo your car and repo your home. Yeah, exactly. It's just not, it's, it's a massive drag, like the legal costs that, like these banks don't want to be sending vehicles to auction or selling houses to recoup funds. car loans are risky like okay home loans are not as much but even that we're seeing the

value of homes kind of go down almost across the board in Canada over the last few years so it's not like they're not risky but car loans are risky and the fact that the national bank analyst was saying oh well it's because they grew car loans from what a small very small base to close to one billion of their loan portfolio so roughly 20 percent that's the reason to explain the the change in delinquency definition i mean like they make it sound like car loans are this magical unicorn that has no risk like that's literally how like i was reading the global text and i'm like first of all if you're getting a loan a car loan with a subprime lender you probably don't have a down payment so you're paying full price so you're getting a full loan so you're getting essentially

100 or 105% loan to value because oftentimes what they'll do is they'll roll in the fees into the loan as well. So you start off with owing more money than the car is owed and like you said, cars lose value pretty rapidly. Obviously we saw the opposite a little bit during COVID, but I think that was probably more an anomaly than the actual norm. So cars go down in value and then you have the cost of recouping the car and then you have to go and sell it at auction and selling at you're not getting the full price either it just there's still like a pretty big amount of risk and there's a reason why a lot of big canadian banks exited the car loan industry yeah because it's not back i think most of them i think bMO was the last one if i remember correctly i think

td might still do financing but they might have existed but yeah most of the banks got out of this business because there's there's not a lot of money in it yeah and it's not great of a business so that's why it's um and let's kind of get back to the essence of this business and this is not just go easy it's just subprime lending these are people that you know either have terrible credit or are trying to rebuild their credit but they're not typically very good borrers so the risk of them missing payments definitely increases it's just to me the car loan argument is one that i have a little bit of trouble digesting. Sure, it's probably less risky than the personal loan, but I don't think it's not this magical pill. It just sounded like that was what the national bank analyst was

trying to say in the Globe and Mail. Yeah, and I mean, what do you, I mean, I guess I can't say this would be everybody, but what do you think people are going to do to vehicles they know we're going to get repoed? Oh, they're going to take real good care of them. Yeah, they're going to, I can Yeah, Go Easy is going to be getting a prime asset there. But yeah, even in the event of a home, yeah, it's a secured loan. They can't pay it. They'll take your home. They got to sell that home.

Then like the legal, you know, the legal situation, the cost that's incurred because they don't just sell your home and take everything from you. Like they sell your home to the point where the loan is paid off and then they have to organize, you know, getting the excess back to you in that degree. And it's not like the secured loans, I guess, is. a cushion from like absolute disaster because the company will likely recoup costs in the terms of a heat lock in the situation of an auto loan like I can't really say because I don't know but I would imagine a big chunk of those are not like fully fully recovered because yeah well exactly

like you're gonna you're gonna recover a higher percentage and just a personal loan yeah like obviously that yeah like obviously unsecured loan you're getting none back which is like the biggest disaster but But they're probably also charging less interest on these loans than a personal loan. So I think it's all that. But I guess for me, I'm just a little bit disappointed by the company and just the fact that. So I mentioned the national bank analyst a few times. And like we can just go on basically what he said in this Globe article because they did

not provide any details in their news release. And maybe provide a more generic news release, but then a link to a more detailed kind of response to the allegation maybe that would have been it's just it's not the best look it's just not maybe they're like everything's above board there's no issues and you know what there's a really good explanation with the for the interest receivable ballooning up on the balance sheet and this is a big nothing burger and you know we shouldn't be worried for no reason but for me i mean when there's a lot of things that like there's some smoke here like i'll just say that that that's my own view that's my personal view people don't need to agree but there seems to be like

some smoke or red flags and their approach to the PR just as not reassured me whatsoever yeah i would agree like i said i would have liked them to come out and and speak somewhat on the delinquencies but like as i had mentioned this is pretty much industry-wide practice so maybe they don't really want to come out and say they're doing this because probably a lot of people don't know they're doing this even though like subprime lenders have have been doing this type of stuff for probably decades but yeah i don't know there's the vast majority of the time a lot of these short reports have not worked out beneficial for the companies who have gone short on them i mean as i had mentioned what was there there shopify dollarama wsp global gfl for the short for the yeah for the yeah so i mean

The research parties. And they target, like, they target low liquidity Canadian stocks and they just hammer on them. But there is some situations where it also does work out. Like, I mean, Lightspeed had that big short report that, again, was a lot of unfair, unverifiable information, but the vast majority of it ended up turning out to be true. And the company was kind of hit. So I think the truth is probably somewhere in the middle. yeah like in in terms of this report and what is actually going on there's probably

it lies somewhere in the middle i think if you're a shareholder you can't just look at these types of reports and cast them aside as some sort of fear-mongering situation because there is some verifiable information in this report that you definitely need to dig into but it still needs the kind of the context of go easy kind of coming out and and stating why it's happening which maybe we get next earnings on the call. Yeah, I think that'd be interesting to see. Yeah, that will probably be it. And there's hopefully going to be a bit more clarity.

If not, I mean, at the end of the daytime, we'll tell. So whether this is actually true or not, I mean, if a lot of the allegations are true, it's going to show up in delinquencies and charge offs eventually, right? Like when people go bankrupt and they just can't pay the loan anymore, you can't pretend and extend so if that is if the allegations of doing that are true it will show up eventually but i mean as a closing remark here i would say look if you own this stock we gave our point of view here i think it's a pretty nuanced point of view we identified some of the stuff that we find concerning but also where the short report there's a lot of allegations that are just not verifiable and i think you have

to take those with a grain of salt just make sure you know what you own and realize that when you invest in the subprime lender you this is a risky type of business just be aware regardless of the type of go easy or someone else like that's the reality like when the economy starts turning around you can just look at history even go easy that went through the great financial crisis they got smashed during the great financial crisis they survive obviously and clearly they've done very well afterwards but that's the inherent risk that you have with these type of companies So just be aware of that. If you're comfortable with that and you want to see what the company says that it's an ex-earning

calls, I think that's a very reasonable approach as well. But like you said, I think it would be a mistake to completely ignore the short report and at least look at it from trying to kind of weigh the pros and cons and also looking at what the sell side analysts are saying and what the actual financial statements are saying to and then make your own decision. yep well said i got nothing else it was a good episode okay yeah fun episode so thanks everyone for listening and we will be back uh i think this one will be this thursday tomorrow so we'll be back on next monday because we are recording as a quick note uh we've said a few times dan is

going to be a dad soon a double dad with some twins coming up so we're trying to we're basically record an extra episode a week to build a little bit of a kind of not buffer back up yeah buffer exactly. So we're recording some extra episodes. On Monday, we'll actually be back for the second part of the AI episode. So we were planning originally to have that one today. But we thought it was a better idea to actually go over the consolation call and go easy because we know it's, they're both pretty widely held stocks from Canadian retail investors. So we thought this would be helpful. So back with the second part of the AI episode. And like I said, we're recording extra episodes. We'll be having some guests too so Dan can take a week or two off from recording when the babies are born.

Yeah, it's going to be, it's coming up soon, I think. So yeah, it's looking forward to that, definitely. It's going to be interesting. Life changing, but really, really good. Okay, thanks again for listening. The Canadian Investor podcast should not be construed as investment or financial advice. The host and guest featured may own securities or assets discussed on this podcast. Always your own due diligence or consult with a financial professional before making any financial or investment decisions.