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Looking for growth? Look to these small caps

Investors could be missing the trees for the forest. While the large cap market is highly concentrated and in the case of many individual large companies, like Commonwealth Bank (ASX: CBA) highly priced, many ASX mid and small caps are trading at reasonable valuations given their more promising growth prospects — especially considering what looks to be this week’s indiscriminate sell off. Here are a few examples.

Spotlight on 1300Smiles

Take 1300Smiles Limited (ASX: ONT), a funny little business that could grow for years to come. The company, which has a market cap of just $142 million, aggregates dental offices in Queensland. In a newer initiative, the company also offers low-cost dental health plans.

When 1300Smiles listed in 2005, overall sales were $5.4 million. By 2012, sales had grown to top $36 million. And there’s little sign this growth will slow, given the first half of 2013 results — including earnings per share growth of 16% over the first half of 2012 — and the company’s relatively massive addressable market. Today, Queensland. Tomorrow, the rest of Australia?

Even better, management has a key objective to “grow profit, control number of shares” — music to a potential shareholder’s ears. 1300Smiles also has nearly $10 million in cash and no debt, and the shares, which trade for around 20 times earnings, pay a fully franked dividend with a yield over 3%.

A key theme: “The rise of the aggregators”

There are other companies also employing this “aggregator” business model that growth-minded investors will want to pay attention to, including Austbrokers (ASX: AUB), which does much the same thing as 1300Smiles does, only with insurance brokers, and G8 Education (ASX: GEM), which does it with childcare centres.

In general, it’s a profitable and highly scalable enterprise, given the persistent fragmentation in, respectively, the dental industry, insurance brokers, and childcare, in Australia. Take a peek at the chart below to see what a colleague of mine has called “the rise of the aggregators” — which is not a new action flick, but a theme to keep an eye on.

All three companies have smashed the S&P/ASX 200 index (Index: ^AXJO) (ASX: XJO) over the last five years. Of the three, 1300Smiles may be the one earliest along in its growth trajectory.

AUB, GEM, ONT vs AXJO

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Motley Fool contributor Catherine Baab-Muguira has no financial interest in any of the companies mentioned in this article. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

 

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