With the S&P/ASX 200 Index (INDEXASX: XJO) near its highest point in over six years investors should ensure that they're invested in high quality companies with bright futures. As Warren Buffett famously said: "Only when the tide goes out do you discover who's been swimming naked."
So called growth stocks are particularly susceptible to the whims of the market, so I've decided to focus on three growing companies that I know smart and successful investors already have a stake in. I'm confident that all three of these companies are quality businesses, and in the long term, I expect they will all outperform the ASX 200 Index.
Indeed, I personally own shares of Pro Medicus Limited (ASX: PME), a healthcare-focused software engineering company that sells Picture Archive Communication Systems (PACS) and Radiology Information Systems (RIS).
The company's competitive advantage is its IP, which allows doctors to view radiology scans and the like from any connected device, without downloading the actual file. This is increasingly useful since the file sizes of scans are getting bigger.
Importantly, 80% of the company's revenue is recurring in nature, and my guess is that it's also quite sticky, because the effort required to change systems would be substantial. Furthermore, the company pays a dividend and has a history of making very wise acquisitions. This suggests that management is both competent and acting in the best interests of shareholders. The main reason I sell shares is when I lose faith in management because one of Warren Buffett's most important teachings is that you should only invest in companies with competent managers that you like and trust.
While Pro Medicus looks very expensive on earnings, free cash-flow should increase rapidly with recent contract signings and a reduction in R&D expenditure. Although it still has a long way to go to live up to its current market capitalisation of over $70 million, I am willing to go along for the ride. I've only purchased a half-sized position so that if the share price falls, I can take advantage of it.
Another interesting stock in the biotech space is pSivida Corp CDI (ASX: PVA) (NASDAQ: PSDV), a company that makes sustained-release drug delivery products designed to deliver drugs directly to the eyeball. Yes, that's right, pSivida is yet another opthalmology stock that will benefit from an older, fatter population – the perfect double-whammy tailwind.
The simple truth is that eye disease occurs partly as a result of age and obesity, so demand should only head in one direction. Much depends on U.S. Food and Drug Administration (FDA) approval for the company's latest product named Iluvien. It hopes to receive approval in September 2014 and if received the company will earn a $25 million milestone payment.
However, even if it does not receive approval the company still has two existing product lines plus European sales of Iluvien to fall back on. The company is dual listed and has a market capitalisation of about $150 million. However, shares are very illiquid and an investment in pSividia is not for the faint hearted. I myself missed the ideal opportunity to buy shares when Iluvien was rejected by the FDA in October last year, partly because I'm very hesitant to invest in any company that is undergoing the expensive and uncertain process of gaining FDA approval.
Finally, Onthehouse Holdings Ltd (ASX: OTH), seems to have lingered at the top of my watchlist for over a year now. The company provides real estate software solutions to real estate agents, and is developing onthehouse.com.au, a distant competitor to the dominant property website, realestate.com.au.
The company's valuation is largely supported by its real-estate solutions business, which generates handy recurring revenue. However, the company is increasingly commercialising its website business and using it to generate leads for the big banks. There's no doubt that this is a company that will benefit from an overpriced and overheated housing market.
In February this year CEO Michael Fredericks commented that the combination of its onthehouse.com.au website and Real Estate Ad Network now reaches more people than domain.com.au, which is owned by Fairfax Media Limited (ASX: FXJ). The main concern to date appears to be that the company hasn't grown profits or cash-flow, although revenue is improving. However, cash-flow is a lot stronger than profit which is distorted due to high levels of amortisation. Based on the first-half results, I think the company is reasonably good value at 55c, and is certainly one to watch if the results show an improvement.
