A recent article by ace Motley Fool writer Morgan Housel on the basic principles of successful investing outlined why it's important to know the difference between a business and a stock.
Some stocks can seem expensive on traditional valuation metrics but the potential of the underlying business to grow at a rapid rate is what should make them appealing to investors.
If growth businesses are able to deliver on their potential then the stock will seem cheap in hindsight as the strength of the underlying business translates into earnings and share price growth.
I know of three stocks that look expensive on traditional valuation metrics, although all three have some common qualities that may mean they represent good value at current prices.
Company 1: Corporate Travel Management Ltd (ASX: CTD) A medium risk investment and a business that sells travel management solutions to business clients around the world.
Common qualities: The company's travel management solutions helps clients save time and money by influencing booking behaviour and promoting cost efficiencies.
These kinds of solutions are relatively easy to sell to decision makers at corporate clients because they are easy to understand and should improve operational efficiencies at clients' businesses. Corporate Travel Management is growing rapidly due to strong new client wins and has a large global market to grow into.
Company 2: Nearmap Ltd (ASX: NEA) A high risk investment and a business that sells access to aerial mapping imagery to mainly industrial clients in the construction, solar power and local government sectors in particular. The business is already successful in Australia and is now starting to expand into the large US market.
Common qualities: The aerial mapping imagery helps clients save time and money by saving on travel costs and promoting cost-saving efficiencies.
These kinds of solutions are relatively easy to sell to decision makers responsible for signing off costs as they are easy to understand and should improve the productivity of a business. Nearmap has made its first sales in the US market and its high profit margins make it an attractive business if able to generate top-line growth as planned.
Company 3: MGM Wireless Limited (ASX: MWR) is a speculative investment and a business that sells cloud-based technology to schools to help them improve day-to-day administration. For example its solutions allow schools to record roll calls in the cloud or digitally communicate with parents on a timely basis.
Common qualities: The technology helps save schools time and money by reducing administration and improving productivity.
These kinds of solutions are relatively easy to sell to decision makers responsible for signing off costs at as the benefits are easy to understand and likely to help the perception of administrative efficiency at a school. MGM Wireless currently has 1,156 schools signed up to its digital technology and is a micro-cap that looks to have potential.
Advantages
The mutually beneficial nature of the solutions these companies sell is what is allowing them to post such strong growth, although risks remain for all three.
Risks to consider
None of them have much of a moat in defending their market share, although Corporate Travel Management arguably now has the scale to give it certain competitive advantages. Given its growth rates it looks an attractive buy when selling for $11 a share.
However, Nearmap and MGM Wireless remain vulnerable to competition and disruption although these are risks common to every small-cap business and if anyone does know of a rapidly growing small-cap without any competitive threats please do let me know.
Overall, I think Nearmap is an attractive buy at current prices, while MGM Wireless is probably fully valued for now.
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