The S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) is an index comprising of 200 of the biggest listed companies in Australia. It's dominated by the big four banks including Commonwealth Bank of Australia (ASX: CBA) as well as Telstra Corporation Ltd (ASX: TLS), BHP Billiton Limited (ASX: BHP), CSL Limited (ASX: CSL) and Wesfarmers Ltd (ASX: WES).
The problem is that the index has gone sideways over the last two years and it's still lower than it was before the GFC.
Stock markets in the USA and Canada are at all time highs. Where has the growth gone that we saw in Australia between 2003 and 2007?
There are companies growing, but it hasn't been our major companies, which are the biggest influencers on where the index goes. The resources boom has puffed out, the banking sector is barely maintaining profits and our retail giants are under siege from overseas.
These big companies could have grown profits if they kept a hold of more of their profits and re-invested the money to expand their businesses. For example, Telstra is paying out 98% of its profit as a dividend, how can the business grow?
I can understand why the management of large businesses feel compelled to pay out large dividends. It's because there aren't any attractively priced opportunities to expand overseas and they are already dominant here, so there isn't much scope for growth.
Franking credits are also a big reason to pay dividends, if the company doesn't pay out the dividend then the credits would just build up and never be used.
We are lucky in Australia to have this tax bonus, but at the same time it could be hindering growth opportunities.
So where is an investor supposed to go if not in the top 10 companies?
If you look a little lower down the list there are some great companies that could continue to grow even if the whole market, or the Australian economy, doesn't grow.
There are large-cap growth companies like Ramsay Health Care Limited (ASX: RHC) and Macquarie Group Ltd (ASX: MQG), which have market capitalisations of $13.4 billion and $29.2 billion respectively. The aging population and long term growth of the global economy will be strong catalysts for each of these large ASX businesses.
You could find growth with smaller businesses like Challenger Ltd (ASX: CGF) and REA Group Limited (ASX: REA), with market capitalisations of $6.1 billion and $6.8 billion respectively. The demand for reliable, safe income products will always be high for retirees, and homeowners will always pay the necessary advertising to sell their property in Australia or overseas.
You could look lower still and find electronic PCB software provider Altium Limited (ASX: ALU) or pet group Greencross Limited (ASX: GXL), with market capitalisations of $1.03 billion and $812 million respectively. Regardless of what the economy does, futuristic products will need the smartest design and the pets of Australia will still need feeding.
Perhaps you would find the best growth looking at some of Australia's smallest caps with big potential like self-managed super fund (SMSF) software provider Class Ltd (ASX: CL1) and National Veterinary Care Ltd (ASX: NVL) at $339 million and $95 million respectively. SMSFs will likely continue growing in popularity and the number of pets in Australia is growing with the human population.
Foolish takeaway
When you're investing in individual stocks, it's nearly always time to buy – there are always a few stocks that are trading at attractive prices. I think all of the above companies have bright futures, with the smaller ones more likely to grow faster over the long term than larger companies.
A sluggish S&P/ASX200 doesn't have to mean your portfolio follows the same trend, by hand-picking smaller stocks the best days of your portfolio could be here.
If all of the above companies I've mentioned don't whet your investing appetite, perhaps these three stocks could provide the best returns of all in 2017.
