Today I wanted to highlight two fast growers that have kept up very strong earnings track records. I usually consider stocks with earnings growth of 15%+ to be fast growers. Also, I want to see that high growth over a number of years, so it isn't just a one-off result.
In the case of these two outstanding companies, even if they slowed down a little, they still would be way above where normal companies regularly operate at.
Fund management firm Magellan Financial Group Ltd (ASX: MFG) has had a stunning run-up in share price and earnings over the past four years. Just in FY 2014, earnings rose a phenomenal 67%.
Now, with the major stock markets like the US being more tempered in their gains, Magellan Financial may not hit those same numbers in FY 2015. Growth may come down some, but it doesn't look like the US will go into a bear market soon.
In September, total funds under management (FUM) stood at $26.8 billion, which is way up from a year before, so management fees can also contribute more. The stock pays a 2.9% yield fully franked and has a 27 price-earnings ratio, indicating investors are still expecting fast growth.
Another fast grower that has been going strong for a number of years is REA Group Limited (ASX: REA), the operator of the realestate.com.au property search website. The housing market has been improving since 2012, but this company has raised net profit almost three times since FY2010.
Typically, annual net profit growth has been between 26% and 35% over the past five years.
The company has such a command of its property search classifieds market that it can charge a premium for its services. Users want to be on the website because they think it gives their properties the best market exposure, so the trend can continue.
REA Group is also expanding overseas in big real estate markets like China and the US. It has a Chinese website called myfun.com to advertise Australian properties to cashed-up Chinese buyers.
In addition, the company just purchased a 20% stake in the third-largest property website in the US, move.com, in partnership with News Corporation (NASDAQ: NWS), which bought the other 80%. We will have to see how that will drive earnings over the next year.
The stock has a 34 price-earnings ratio and a yield of 1.5% fully franked. If it can achieve its average earnings growth again, the seemingly high PE may actually be at a reasonable level.
I think both can maintain their fast grower status for a number of years to come. Investors still have to be careful of high PE stocks because they can sell off quickly if they disappoint the market.
