A lot of bargains have been popping up in our local stock-market lately – thanks 'Grexit' and Chinese stockmarket woes!
It's tough to find great companies on the cheap but right now there are a number of stocks I'm watching on offer for prices that investors would have walked over hot coals to buy 12 months ago.
Better yet, they're cheap because of market upsets or disappointed expectations (sorry, no overnight millionaires to be made here!) rather than because of competitive pressures or a lack of performance.
All of the following five companies have fantastic long-term growth potential, and look to be an excellent way to grow your wealth over the long term – if you can handle a little volatility.
Here are my ideas for the five best growth opportunities on the ASX right now:
- REA Group Limited (ASX: REA) – yields 1.6%, fully franked
Never underestimate the power of network effects. More sellers attract more buyers, which in turn attracts more sellers, which in turn allows REA Group – which has fairly low fixed costs due to its online nature – to churn out profits.
This creates economies of scale for investors meaning that profits can grow at a faster rate than revenue. REA disappointed investors earlier this year by posting a 21% increase in revenue and a 30% increase in Earnings Before Interest, Tax, Depreciation, and Amortisation (EBITDA) for the 9 months to May.
Shares subsequently fell 25% and are currently down 10% for the year. Needless to say, selling looks like a poor decision on behalf of investors. Network effects make for a powerful moat and if REA can build on its success overseas (in fact, even if it can't) the company has plenty of space to grow its market share and is a great buy at today's prices.
- Carsales.Com Ltd (ASX: CAR) – yields 3.2%, fully franked
Carsales.Com has a lot in common with REA group, including its online nature, economies of scale, and network effects. In addition to growing Australian market share, this company is expanding overseas into Brazil, South Korea, Malaysia, Indonesia, and Thailand thanks to its shareholdings in similar businesses in these regions.
Carsales has also acquired a financier in order to offer financing services to customers for private-to-private car sales. Revenue and profits are both growing at double-digit rates and the long-term tailwinds are enormous given CAR's relatively small market share. Carsales.Com has 'opportunity' written all over it.
- Flight Centre Travel Group Ltd (ASX: FLT) – yields 4.5%, fully franked
Flight Centre is another company that took a beating recently after it lost a small amount of market share to online competitors. Shares fell $12 on the news, and the company is now down 30% for the year.
The threat of online competition to Flight Centre has been overstated for years, and while I feel that the company could see business worsen in the near term due to weaker consumer confidence, low wages growth and higher unemployment, its long-term business looks sound. Flight Centre is also expanding successfully into Europe and the USA and I expect international earnings to become a significant driver of growth in the future.
Even if revenue and profit margins plummeted from here, the company still looks substantially undervalued – and then there's the 4.5% dividend.
- Greencross Limited (ASX: GXL) – yields 2.9%, fully franked
Investors paying over $10 for Greencross Limited a year ago would surely have walked across hot coals to pick them up for $5 at the time. Now the stock is on sale for half price, investors are avoiding it like the plague.
I wrote in some depth yesterday why the market has Greencross wrong, but suffice to say that it is expanding in a highly fragmented yet growing market and its wide range of services and private label products allow plenty of potential for growth through both cross-selling and an increasing number of new customers. Greencross has also grown EBITDA faster than revenue in previous years, indicating the company is successfully achieving economies of scale.
Less than half of Greencross' growth comes from acquisitions, and both the retail and veterinary arms are currently delivering 6% growth in Like-For-Like (LFL, or 'same store') sales. At today's price, this company is very hard to pass up.
- Nearmap Ltd (ASX: NEA) – no dividend
Nearmap is to my mind the riskiest of these five companies, thanks to its small size and fledgling product offer. The company offers 'geospatial mapping solutions' to a variety of businesses including governments, insurers, construction companies, rail yards, solar installers, and so on and captures high-quality aerial images of Australian cities several times a year.
The business has shown itself to be consistently profitable thus far and recently posted profit guidance forecasting a 29% increase in revenues to $23 million and reaffirming its Australian $30-50 million revenue target by December 2015.
Nearmap is also currently expanding in the US and has already clinched its first paying customers. Over the longer term, the business is contemplating a dual-listing and aims to replicate its Australian $30-50 million revenue target in the USA by December 2017. If all goes according to plan the business could double in size over the next few years, and at today's prices it looks to be a medium-risk, high-reward proposition for investors.
So there you have it, my five-stock instant growth portfolio. I'd say it will be pretty hard to beat and while I only own two of the above, I'm working on adding the remaining three to my portfolio ASAP.
