Growth stocks are the most desirable for investors, yet how do you get around the premiums you may have to pay to own them?
You could try to buy them before they get noticed too much by the market, but that could be a little risky if they are still early in their start-up phase.
Another way is to buy solid performers that you could be fairly certain can maintain their earlier earnings trajectory. That comes down to knowing the quality and durability of the company behind the stock. One of billionaire investor Warren Buffett's techniques for stock picking is to look for companies with strong brand names that can charge premiums for their services and products. (for more techniques, see below)
Here are three stocks that have performed well with enviable past earnings growth that could give your portfolio a boost.
1) REA Group Limited (ASX: REA)
Realestate.com.au, REA Group's property website, is the nation's number one online real estate listings market leader. As such a popular site, it is hard for other sites and businesses to compete. Property sellers want to be on the site that gives them the best chance to sell their home. Real estate agents want to have their listings on the best site to get the best market exposure.
Median analyst forecasts are for earnings to possibly rise an average 27% annually for the next two years. It has a 38 price-earnings (PE) ratio, so it isn't cheap. Still, at even 25% annual average growth, earnings could potentially double in less than three years.
2) Magellan Financial Group Ltd (ASX: MFG)
This fund management business specialises in international equities and investments. Its funds under management (FUM) are now $25.15 billion. It also attracts management fees, so as FUM increases, the fee amount rises as well.
Because international financial markets like the US are rising higher than Australia, more clients want to take advantage of the potentially higher rates of return. Magellan Financial raised earnings remarkably in FY 2014 and FY 2015 could follow suit. It has a 27 PE.
3) Slater & Gordon Limited (ASX: SGH)
With such brands as Slater & Gordon, Trilby Misso Lawyers and Conveyancing Works, this network of 66 law offices has been growing steadily across Australia. It also has 13 locations in the UK operating the brand names of Russell Jones & Walker and Claims Direct. FY 2014 full year net profit was up about 47%. It continues to expand its network, with plans to acquire two more law firms by November.
Many law practices may be operated by single, private owners, so it is a market that Slater & Gordon can keep growing in. The stock has a 19.5 PE and analysts forecast a median 12% annual growth rate over the next two years.
All three stocks have some special competitive advantage which can possibly support further growth. You may be able to pick up shares during a market sell-off. I think Slater & Gordon probably offers that balance of high growth and sustainability for investors to be more confident about.
Actually, there is another stock that is not as well known, yet has a solid dividend and good growth prospects. It's not as widely followed, but that is to your advantage. This small-cap ASX stock was named The Motley Fool's #1 pick for 2014-15. Simply click here to find out which stock we rate to have a great end to the year.
