It might be surprising to learn that little known FSA Group Ltd (ASX: FSA) has outperformed household name REA Group Limited (ASX: REA) over the past 10 years. The share price of FSA Group has risen 3,346% over this time compared to 2,609% for REA Group.
FSA Group specialises in helping people in financial trouble by arranging bankruptcies and debt agreements with creditors. A debt agreement is an arrangement where a debtor pays a portion of what is owed and in exchange creditors forgive the rest of the debt.
Regulators introduced debt agreements into the Bankruptcy Act in 1996 and since then, there has been a shift towards debt agreements instead of bankruptcy.
Debt agreements are preferable to bankruptcy for both debtors and creditors. Debtors can avoid the stigma and legal consequences of bankruptcy and creditors receive more of what they are owed compared with bankruptcy, where they usually receive nothing.
FSA positioned itself when the industry was in its infancy and is the current market leader, providing 45% of all new debt agreements last year. In addition to insolvency services, the company now offers home loans, car loans and business loans to those with poor credit histories.
Thanks to its expansion into lending, the company is now subject to interest rate and default risks which was not the case 10 years ago. Also, the insolvency business has much lower growth prospects today, and so FSA no longer represents the investment opportunity that it once did.
In order to find the next FSA or REA Group, it is useful to understand what these companies looked like before their meteoric rises.
What did REA Group and FSA Group have in common back in 2005?
- They were tiny companies – FSA had a market capitalisation of just $3 million compared with $170 million for REA Group.
- They were profitable – FSA reported a profit after tax of $1.3 million in 2005 compared to $7.9 million for REA Group
- They were market leaders – FSA delivered about half of all new debt agreements in 2005 and 80% of Australian estate agents subscribed to realestate.com.au in 2005.
- They operated in new and growing industries – Changes to the Bankruptcy Act in 1996 created a new market for FSA's services, and the growing popularity of the internet provided a superior channel for classified advertising.
Foolish takeaway
There are likely to be many listed companies with the above qualities that never go on to achieve the success of either FSA or REA Group. However in my opinion, companies with these traits are more likely to be the next FSA or REA Group than those without them.
Analysts at the Motley Fool have identified two stocks that have the above traits. If you are comfortable accepting the extra risk that comes with investing in small stocks, then follow the links below…
