There is nothing better than purchasing a wonderful company when it's small. Just imagine buying the likes of REA Group Limited (ASX: REA) or CSL Limited (ASX: CSL) a decade ago – your investments would be up 5,922% and 978% respectively, excluding dividends!
While these types of returns are of course anything but the norm, focusing on emerging companies with smaller market capitalisations is the way to identify wonderful firms before they get big.
Here are five emerging companies which have the potential to become much bigger companies and have the added benefits of paying a dividend. They are all expected to grow their earnings per share (EPS) by at least 10% in the current financial year and are trading on price-to-earnings (PE) multiples that look reasonable considering their growth outlook.
1) Flexigroup Limited (ASX: FXL) has significant potential to expand its financial services business. With EPS growth of 12% forecast, the stock trades on a forward PE of just 14.7.
2) SFG Australia (ASX: SFW) also has enormous scope to expand its wealth management services. With EPS expected to also grow by 12% this year, SFG is trading on a forward PE of 14.6.
3) Dick Smith Holdings Ltd (ASX: DSH) hasn't had the easiest beginning to listed life, however at least one broker sees substantial opportunity for earnings growth. Based on this broker's numbers, the retailer is trading on a PE of just 12.5. For perspective, Dick Smith has a market capitalisation of around $500 million, while its fierce competitor JB Hi-Fi Limited (ASX: JBH) is a much larger business with a market cap of $1.8 billion to match.
4) Trade Me Group Ltd (ASX: TME) is basically New Zealand's answer to eBay Inc. The online business is forecast to achieve earnings growth close to 19% over the next two years; this level of growth could well justify its forecast PE of 19.7.
5) Kathmandu Ltd (ASX: KMD) also hails from NZ and has good growth prospects and the potential for international store expansion. Strong double-digit growth is forecast for the outdoor adventure retailer, yet it trades on an undemanding PE of 13.8.
Foolish takeaway
When searching for potential 'multi-bagger' stocks, the key is to identify companies that have long growth runways ahead of themselves. The ability to keep growing for many years is the key to substantial earnings growth and long-term share price outperformance.
