The Best Australian Stocks

You could say Australian investors are spoiled for choice. The Australian Stock Exchange, the ASX, is home to more than 2,000 listed companies. Its total market capitalisation is over $1 trillion, making it one of the world's 10 largest stock markets!

With such a large number of companies engaged in all manners of business, breaking the ASX down into sectors is one handy way for investors to narrow down their search for companies into more manageable parcels.

A look at the ASX's 'usual suspects'

Generally speaking, the sectors most interesting to investors include Financials, Consumer Staples, Telecommunication Services, Industrials and Resources. The reason these sectors are closely followed by everyone from individual investors, to broking analysts, to large institutional investors,is because they're the reserve of the largest, most important, prominent and widely owned corporations in Australia.

Take all four of the big banks — namely Australia and New Zealand Banking Group (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), National Australia Bank (ASX: NAB) and Westpac Banking Corp (ASX: WBC) – there's nearly the whole of Australia's Financial sector. The Consumer Staples sector is home to Wesfarmers and Woolworths.

Australia's most widely held stock, Telstra Corporation Ltd (ASX: TLS) is of course in the Telecommunications Services sector. The Industrial sector — which is a relatively broad categorisation — encompasses everything from mining and construction service firms such as Downer EDI  Limited (ASX: DOW) and Leighton Holdings Limited (ASX: LEI), all the way to airline Qantas Airways Limited (ASX: QAN) and employment advertiser SEEK Limited (ASX: SEK). Between giants BHP Billiton Limited (ASX: BHP) and Rio Tinto Limited (ASX: RIO), you've got the Australian resources sector.

More to the story with Australia's most popular shares…

These large companies have many shareholders, it follows, but that's not just because they have such huge market caps. There's another factor.

Australia's truly enormous shareholder bases are the result not just of large market capitalisations — but also of being previously government owned, whereby Australian citizens got the first opportunity to invest in the companies.

A quick glance at the table below shows that Commonwealth and Telstra, both of which in their former lives were large government-owned entities, boast the largest shareholder numbers in the country. (Smaller government floats such as Qantas and CSL have smaller shareholder bases. In Qantas' and CSL's case the number of shareholders is 124,000 and 94,800 respectively.)

Number of shareholders (as of this writing)

ANZ= 439,000

Commonwealth Bank = 786,000

National Australia Bank = 483,000

Westpac = 563,000

Wesfarmers = 490,000

Woolworths = 424,000

Telstra = 1.4 million

BHP Billiton = 585,000

Rio Tinto = 251,000

It's not surprising the most widely held stocks are also the most widely followed and popular stocks! It's difficult for any investor to open a newspaper to the business pages, or click on their favourite business news site, and not hear about the latest developments and share price moves of the these 10 companies.

Here's the kicker: it's not the most widely owned or most widely followed stocks which necessarily provide the greatest returns to shareholders. Being extremely popular doesn't equate to extreme wealth creation. In fact, often it is quite the opposite! 'Undiscovered' growth stocks can provide the greatest long-term returns.

Consider this. While the returns for investors who invested in Commonwealth Bank when it was first floated in 1991 (through a partial sell-down by the Commonwealth Government at $5.40 per share) probably still smile at their purchase, over the past 10 years CBA's share price has increased a much more muted 175%.

Let's not kid around: That's still  good when you consider the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has increased by only about 66% over the past decade.

Yet Australia's very best stocks — the true star performers – have mostly been lesser-known small cap stocks that have grown into the large, market leaders of today. These stocks in particular have produced truly mouth-watering returns for shareholders.

How you'll find your next big winner

Interesting, no single sector really stands out as creating the 'winning stocks' or 'top stocks'. For example, the following three stocks which boast some of the most phenomenal shareholder returns in the past decade all come from different sectors….

Biopharmaceutical company CSL Limited's (ASX: CSL) share price (which excludes dividends) has increased by a stunning 700% in the past decade. Meanwhile, iron ore miner Fortescue Metals Group is up a staggering  7,250% since listing in 1989 (Andrew Forest was elected Chairman on July 18, 2003).

Of course, these returns are now truly in the past – and you'll have to look elsewhere for tomorrow's winners.

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