In the past 12 months, small and medium cap stocks have lucked out – the S&P/ASX Small Ordinaries Index (ASX: XSO) has fallen nearly 10% whilst S&P/ASX 200 (ASX: XJO) (^AXJO) has risen 5%.
So could 2014 be the year of the small cap? This investor thinks so. And there's plenty of good companies on offer.
Perhaps the best growth models are those which allow a company to grow both organically and acquisitively. That is, their services continue to witness growth because of their brand reputation, niche market position, or innovation and consolidation of markets and competition.
In the Australian pet care market, Greencross Limited (ASX: GXL) is a veterinary and retail services provider doing just that. It has experienced significant growth as a result of both its ongoing consolidation of the market and people's growing reliance upon specialist veterinary services and retail products. Think animal training, surgery, emergencies, ultrasound and preventative care. Greencross' half-year results announced today prove its ongoing strategy to obtain a 20% market share (currently it has only 5% of the market) is working. It has seen revenue growth of 25%, EBITDA growth of 13% and EPS growth of 10%.
From taking care of pets to children, the investment thesis remains the same. If you couple rising childcare costs, lack of industry consolidation, deep pockets and a company willing to undertake acquisitions, you get a nice growth profile. G8 Education Ltd (ASX: GEM) announced today it will acquire an additional 63 premium childcare and education centres to complement its rapidly expanding asset base which will now total 296 centres throughout Australia. As time goes on, G8's reputation and market share will grow, along with its dividends and share price.
Why change a strategy which works? That's exactly what Slater & Gordon Limited (ASX: SGH) senior management would have asked themselves when they started their aggressive expansion into the United Kingdom. After listing on the ASX in 2007, the law firm has witnessed exceptional growth. Particularly in 2013 when it made six acquisitions in the European market and moved into non-personal legal services in Australia. The company has a goal of meeting 45% of group revenue from the UK by FY15 – where the legal market is between four and five times larger than Australia's.
International expansion is a logical step for many of Australia's specialist services providers. Many may not be aware but Cash Converters International (ASX: CCV) has more stores in the UK than Australia. Now, it's looking to consolidate the New Zealand and Australian market with additional purchases. In late 2013, the group announced an acquisition of five more stores (four in Victoria, one in New South Wales) and a 25% investment in the New Zealand Cash Converters Master Franchisor for $5 million. In NZ there are 14 stores – nine of which are franchised and five are owned by the NZ Master Franchisor. In the next five years the group plans to grow its presence to 50 stores.
Foolish takeaway
These four companies are primed for further growth in 2014 and beyond. Although some (G8 Education and Greencross) may appear expensive, a deeper understanding of these businesses proves they're worth paying-up for. At current prices Slater & Gordon and Cash Converters hold exceptional long-term potential.
