Some of the best long-term returns generated for investors have come from those companies that have grown from relatively small companies into the blue chip shares we know today.
For example, companies like Ramsay Health Care Limited (ASX: RHC) and CSL Limited (ASX: CSL) all started their listed lives as much smaller companies than they are today.
Although these companies may still deliver great returns in the future, I think it is important for investors to be on the lookout for smaller companies that have the potential to grow into the shoes of a blue chip share.
Two companies that I think have the potential to do so, include:
Challenger Ltd (ASX: CGF)
Challenger already has a market capitalisation of just over $5 billion but I believe it has the capability to grow into a much larger business over time.
The company is the clear market leader in providing annuity products in Australia, and as the chart below highlights, is becoming a more significant player in the funds management industry with around $55 billion currently under management.
Although the funds management division has grown strongly over recent years, it is the annuity division that I believe will give Challenger the biggest opportunity to prosper in the future.
There are a number of tailwinds in the retirement income market including an ageing population, an ever increasing pool of retirement savings and a regulation framework that is becoming more supportive of the products that Challenger provides.
I also believe the demand for less volatile and more reliable income streams is likely to increase in the future and this will also play right into the hands of Challenger.
Investors should note that the share price can be quite volatile at times, although I expect Challenger to be a consistent performer over many years.
SEEK Limited (ASX: SEK)
SEEK has been one of Australia's biggest and best performing technology shares for a very long time, although its lacklustre performance recently may have some investors concerned.
The share price has come under pressure over the last few weeks after the jobs advertiser surprised the market with FY17 guidance that was probably much lower than what investors were expecting, considering the shares were trading on a price-to-earnings ratio of more than 30.
Despite its recent under-performance however, I believe management is setting the company up for much stronger growth in the future as it is looks to forgo short term gains to create long-term returns.
The global job advertisement and recruitment market is massive and I think SEEK has only scratched the surface when it comes to the size of its potential target market.
As the slide below highlights, SEEK has already proven it has the ability to expand its footprint globally and I remain very confident that even more countries on that map will become blue in the future.
While some investors may have been disappointed by the company's most recent earnings update, I think it is important to take a long-term view of the company and understand that growth in the future will require an investment today.
There is little doubt that SEEK has the potential to grow into a much larger business than it is today and I believe it is just a matter of time before it becomes a true blue chip share of the ASX.
