As I wrote here previously, investors should always keep an allocation of blue-chip stocks like CSL Limited (ASX: CSL) and Telstra Corporation Ltd (ASX: TLS) as part of their core portfolio, given the stability of blue-chips in times of cyclical downturns.
Whilst I still wholeheartedly believe this to be true, rating both CSL and Telstra as current buys, part of portfolio allocation requires investors to also take on some risk and invest in something that offers more juice in the growth department. This is so the overall portfolio return is turbocharged, as holding blue-chips alone is unlikely to get you the S&P/ASX 200 Index (ASX: XJO) beating return you should be after.
With this in mind, I thought it wise to look at Retail Food Group Limited (ASX: RFG) and Sirtex Medical Limited (ASX: SRX) as I believe both stocks would do well as growth options in any investor's balanced portfolio. Here's why.
Retail Food Group
If you haven't been following already, Retail Food Group is an old favourite of mine with management consistently under promising and over delivering. The stock surged 17% in August alone, after management provided an upbeat full-year result and another acquisition.
Underlying net profit after tax (NPAT) was up 20.5% for the year, with management forecasting another year of 20% growth to underlying NPAT in 2017, thanks in part to the integration of vertical supply chain group – Hudson Pacific Corporation.
The acquisition should see operational synergies form as Retail Food Group leverages both its existing network and newly acquired supply chain to cross-sell products to franchisees. This should see its dividend grow well into the future if management executes to plan.
Of course, the risk with acquisitive business models is that things could unravel very quickly with one bad move. (Just ask shareholders of Slater & Gordon Limited (ASX: SGH) to tell you what I mean).
Nevertheless, prudent acquisitions can work wonders as demonstrated by Domino's Pizza Enterprises Ltd (ASX: DMP), thus given Retail Food Group's track record, I'd expect it to be in the latter camp.
Sirtex Medical
Cancer treatment and biotech outfit Sirtex is primed for blue-chip status if it can continue growth at current rates. In the full year to 30 June 2016, Sirtex reported NPAT growth of 32.8% after global dose sales increased 16.4% due to strong growth in its American market.
With Sirtex presently penetrating only 2% of the global market for its SIR-Spheres, management expects Sirtex can continue double-digit sales growth for the year ahead. This augurs well for its dividend, which grew by a whopping 50% in 2016 alone.
At a price-earnings of almost 34x, the risk with Sirtex is that it isn't cheap. A lot of Sirtex's growth relies on its ability to increase sales doses in its only product – the SIR-Spheres. Accordingly, one bad clinical study could spell the end of it, given the market appears to be pricing in years of double-digit sales growth already.
Foolish takeaway
Although both Retail Food Group and Sirtex offer the promise of explosive growth, investors must be cognisant that they have not earned blue-chip status yet.
Investors that buy Retail Food Group and Sirtex Medical shares must know that the shape price consistency provided by companies like Transurban Group (ASX: TCL) and Sydney Airport Holdings Limited (ASX: SYD) is non-existent in the former two (so far), thus any purchase should be confined to the growth allocation of a balanced portfolio only.
