Finding companies at the beginning of a long, upwards growth trend is like nirvana for most investors – that is assuming after identifying the opportunity the investors first act on it by purchasing stock and second, that the investor hangs on for the ride as the company grows.
A business strategy with a somewhat chequered history but which is proving to be both well executed and profitable in the following three examples is a consolidator (also called roll-up) strategy. A consolidator is generally a firm that identifies an opportunity to "corporatise" an industry and thereby create economies of scale with flow-on efficiencies and profits.
Here are three companies that have in recent years moved to consolidate the respective industries in which they've seen an opportunity due to the large number of individual operators.
Roll up, roll up
Capitol Health (ASX: CAJ) is a Melbourne-based firm with a current market capitalisation of $166 million. The firm is engaged in providing radiology services and sees considerable opportunity to further consolidate a fragmented industry in which it already has 48 clinics.
Greencross' (ASX: GXL) stated aim is to be Australia's leading veterinary group by focusing on synergies and standardisation across the group. Having been established in 1994, the firm has since acquired and integrated over 100 veterinary practices, laboratories and pet crematoria across the country and now boasts a market capitalisation of $244 million.
G8 Education (ASX: GEM) has in just seven years grown into an $887 million company. The firm initially saw the opportunity to consolidate single-centre child care operators, which were becoming increasingly burdened by government regulations. Since its formation in 2006 the company has acquired over 160 centres and has just announced the acquisition of a further 29 centres located across NSW, Victoria and Tasmania for $42.6 million.
Performance
To highlight the kind of growth trajectory these three stocks have achieved, here is a chart of each stock's share price performance compared with the S&P/ASX 200 Index (Index: ^AXJO) (ASX: XJO). As the chart shows, each consolidator has outperformed the index by at least 100% in the past 12 months, with Capitol Health the standout having shot up 483%.
Source: Google Finance
Foolish takeaway
The key to finding companies with high growth potential is to look at the smaller end of the market. It is rare that large blue-chip stocks that already command major market shares can ever achieve these types of growth rates, whereas small companies can potentially grow at fast rates for a long time given their humble beginnings.
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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.
