Canadian subprime lending firm Goeasy Ltd. has experienced a dramatic stock collapse following its disclosure of hundreds of millions in loan losses last week. For Victor Bonilla, the short seller who flagged risks in the company's financing business back in September, this moment represents a significant validation of his warnings and what he calls a 'come clean' opportunity for the troubled lender.
The Prescient Warning and Subsequent Fallout
Bonilla, who works with Florida-based Jehoshaphat Research, originally sounded alarms about Goeasy in September, claiming the company was improperly delaying $300 million in credit losses and concealing unreported delinquencies within its balance sheet. His bearish report initially caused Goeasy shares to decline, though the company denied the allegations at the time and reaffirmed its financial outlook.
The situation deteriorated further in November when Goeasy missed analyst estimates for the third quarter, attributing the shortfall to higher-than-expected loan-loss provisions. This development dealt another blow to investor confidence and set the stage for last week's dramatic announcement.
A Devastating Disclosure
Last Tuesday, Goeasy shares plummeted 57% after the company disclosed $331 million in net charge-offs for the fourth quarter. This included $233 million in write-downs specifically tied to consumer loans, interest, and fees from its LendCare Holdings subsidiary. The disclosure confirmed many of Bonilla's earlier concerns about the company's financial health.
In response to the crisis, Goeasy announced a comprehensive overhaul that includes revising past disclosures related to LendCare payments, implementing a stabilization plan focused on direct-to-lending operations, and confirming Felix Wu as the permanent chief financial officer. Cumulatively, Goeasy stock has now declined more than 80% since Jehoshaphat Research published its critical report in September.
Bonilla's Cautiously Optimistic Assessment
Despite the devastating losses, Bonilla has adopted a surprisingly positive tone regarding Goeasy's recent actions. "My impression is that they've come clean about it," he stated, adding that "the new management team has come out and I think they've said: 'We've got to clean up this mess, we've got to begin the process of reestablishing credibility with the market.' And I think they're doing that."
Bonilla, who also serves as chief investment officer at Carrollwood Capital Management LP in Tampa, Florida, noted that Goeasy's updated projection of a mid-teens net charge-off rate for the current year aligns with his own 15% estimate. He expressed confidence that management has made a "pretty honest attempt" at addressing the company's problems and said he would be "very surprised" if additional negative revelations emerge.
Not Ready for Investment Despite Improvements
While acknowledging Goeasy's corrective actions, Bonilla remains cautious about the company's investment prospects. He has not taken a long position in Goeasy shares and recently stated on social media platform X that the company would require "a total re-underwriting" before it could be considered a viable investment opportunity. He plans to closely monitor the company's fourth-quarter results scheduled for release on March 25.
Pattern of Successful Predictions
Bonilla's accurate assessment of Goeasy follows a similar successful prediction regarding Chinese power tool manufacturer Techtronic Industries Co. Ltd. In February 2023, he warned that the company's earnings would fall short of expectations due to undisclosed higher expenses from inventory destocking. Approximately six months later, Techtronic shares dropped 17% after the Hong Kong-based firm reported weaker first-half results attributed to those very expense issues.
Bonilla began his deep analysis of Goeasy after noticing what he considered suspicious patterns in the company's rapidly expanding loan book and unusually low delinquency rates for a subprime lending operation. His concerns have now been substantiated by the company's own disclosures, though Goeasy declined to comment for this story.
The dramatic events surrounding Goeasy highlight the ongoing challenges in the subprime lending sector and the important role that independent analysts play in identifying potential financial irregularities before they become full-blown crises.
