Owning blue chip stocks is vital for every investor.
Not only do they help build a solid foundation for a share portfolio, but they are also more defensive in nature and usually offer a steady income stream in the form of dividends.
However, there is also a problem often perceived with owning these stocks, and that is that they don't normally possess the same growth potential as small or medium-cap companies. They represent well-established companies after all, and much of their growth is therefore behind them.
But imagine owning shares in a company before it attained that lucrative blue chip status.
Consider what it would be like to own the shares through that period of enormous growth, and soaking up all the share gains and dividends distributed along the way.
For instance, imagine if you'd have bought shares in Commonwealth Bank of Australia (ASX: CBA) or Woolworths Limited (ASX: WOW) when they first started trading on the ASX. Commonwealth Bank's shares were trading hands for $6.82 in 1991 while Woolworths' shares were priced at $2.84 in 1993.
In those times, Commonwealth Bank's shares have skyrocketed 1,106% while Woolworths have jumped 1,168%. When you include dividends, those figures are even more astonishing at 1,700% and 1,570% respectively.
Had you invested $5,000 in both companies upon their inception to the local market, they would now be worth $173,500. Or even more had you reinvested all the dividends and let the function of compounding returns work its magic along the way…
With that in mind, here are three companies that are all in high-growth stages of their lives. Although they might not appear to be the cheapest buys based on their P/E ratios (reflecting the high expectations of investors), each are in box-seat positions to deliver strong returns over the long run, and could well become the blue chips of tomorrow…
- Carsales.Com Limited (ASX: CRZ) – The company operates Australia's leading online automotive classified website. Carsales.com expects to announce EBITDA of around $138 million when it reports next month, compared to the $120.1 million delivered in FY13 – an increase of 14.9%. As more and more buyers and sellers use the site, Carsales.com will develop a wider moat while its earnings should also continue to improve significantly. Shares are trading at $11.20 and are expected to yield 2.9%, fully franked.
- G8 Education Limited (ASX: GEM) – The childcare centre operator has seen incredible growth in recent years. While the shares have risen 81% in the last 12 months, they have skyrocketed a massive 719% since mid-2010. The good news is, it's by no means too late to buy. The company has been busy acquiring childcare centres across Australia, yet it still only boasts a small share of the overall market, leaving plenty of room for expansion. Shares are currently priced at $4.83 and are expected to yield 3.9%, fully franked.
- Veda Group Ltd (ASX: VED) – The data analytics company only debuted on the ASX late last year, and while it performed extremely well over the first few months, it has since dropped back considerably. Credit reporting standards are only going to become stricter as time passes and while Veda remains relatively protected from new competitors (it would be extremely costly for any new companies to impede on Veda's turf), the company looks set to benefit in the long-term.
Another ASX stock primed for growth – FREE!
At their current prices, none of the companies mentioned above are screaming bargains right now, but as Charlie Munger taught Warren Buffett, sometimes you just have to pay up for high quality corporations. Carsales.com, G8 Education and Veda Group all have the capacity to become much, much larger over the coming years, and a buy today could prove to be a very profitable decision.
