The best way to beat the market is to choose undervalued growth companies that can deliver excellent compound growth.
Most ASX blue chips are unlikely to deliver market-beating returns for long periods of time because they are already so large. That's why I think it's better to go for smaller businesses with much more growth potential.
The share market has delivered average returns per annum of 10%, so I think we need to find businesses that are growing revenue by at least 10% a year. Rising profit margins and dividends should be bonus returns on top. Here are three ASX shares to fit the bill:
Pushpay Holdings Ltd (ASX: PPH)
Pushpay is one of the most promising technology shares on the ASX today. The donation payment business helps not-for-profit organisations like churches with an app and enabling electronic donations.
The recently-announced acquisition of church management system Church Community Builder should create a number of operational synergies because the combined offering for clients is improved and each business can offer services to the client base of the other.
In the recent half-year result Pushpay unveiled revenue growth of 30% and gross margin improvement from 57% to 65%.
Webjet Limited (ASX: WEB)
Webjet is a growth share that has been around for a while, but its share price is down about 20% over the past five months, partly because of the Thomas Cook collapse. I think this is a good opportunity
Management continue to believe that WebBeds – its B2B business – can reach an earnings before interest, tax, depreciation and amortisation (EBITDA) margin of 50% by FY22 as it scales. Its blockchain offering called Rezchain will play a part in reducing costs. Rezchain has been launched as a commercial product to the wider travel industry.
Webjet is guiding that in the first half of FY20 its underlying EBITDA can grow by "at least" 37% to $80 million and underlying FY20 EBITDA can grow by at least 26% with at least 16% of organic EBITDA growth.
There is also talk of a potential takeover, which would obviously be a boost for the share price if an offer came through.
Altium Limited (ASX: ALU)
Altium is one of the world's leading electronic PCB software businesses. The booming Internet of Things and increasingly technological nature of the world is giving Altium a strong tailwind.
The company has a very focused management team, it's aiming to be the clear number one player in the world, grow revenue and grow profit margins. If it achieves its annual revenue target of US$500 million by 2025 it could be quite cheap at this price.
Over the next few years the EBITDA margin could reach 40% (or more). In FY20 revenue is expected to grow by at least 19% and the EBITDA margin should improve by at least 0.5%, up from 36.5% in FY19.
Foolish takeaway
All three shares have very promising futures. I think Webjet has the best chance of beating the market in 2020, but Pushpay is definitely one to watch.
