When it comes to investing it's important to follow a recipe to build your wealth. That recipe should include the core ingredients of solid blue-chip stocks and a few mid-cap companies with growth potential. Much like cooking at home, the results will be always better when you follow a timeless recipe for success and don't gamble on taking your own path to riches.
Two of the commonest mistakes when searching for mid-cap growth companies are paying too much for fast growers, or buying companies that look cheap, but have no real growth potential. The best companies are reasonably priced and have the potential to grow faster than the market expects. Here are a few New Zealand-based options to consider.
Outdoor clothing and equipment retailer Kathmandu Holdings Ltd (ASX: KMD) looks to have what it takes to reach the top. The company delivered a net profit of NZ$44.2 million on NZ$384 million of sales last financial year. It plans to open 15 new stores across Australia and New Zealand this financial year to take the total to more than 170. It also has a substantial presence in the large UK market.
In February Kathmandu appointed David Kirk as chairman, this is significant as international online sales could be the key growth driver for its business. Mr Kirk is also chairman of New Zealand-based website Trade Me Group Ltd (ASX: TME). If he's able to leverage his considerable experience running Trade Me to develop Kathmandu's online sales through its own website and global marketplace websites then Kathmandu may have a big climb ahead of it yet.
Kathmandu trades on a reasonable price-earnings around 15 based on FY 2014 analyst consensus forecasts and fully franked dividend yield of 3.7%.
Trade Me Group is an online marketplace and classified advertising business that has taken New Zealand by storm in recent years. It's a free-market freak that lets entrepreneurial Kiwis trade everything from second-hand sneakers to million-dollar houses. Almost as popular as the All Blacks themselves, it also operates in the roommates, romance, jobs and car markets among others.
Its market value is more than $1.5 billion and it turned a net profit of NZ$38 million for the six months to December 2013. Selling at $3.72 it trades on a reasonable forward price-earnings ratio around 18 based on analyst consensus forecasts. It may be approaching bargain prices of its own given the growth potential, digital tailwinds and network effect supporting the business model.
Last week Fisher & Paykel Healthcare Corp Ltd (ASX: FPH) upgraded its guidance for net profit to be approximately NZ$97 million for the financial year ending March 31 2014. It operates in the sleep treatment and respiratory care businesses and looks to have a long growth runaway ahead of it. Based on analyst consensus forecasts it trades on a forward price-earnings around 23. It looks to be fully priced now for, but the solid long-term growth prospects remain.
No coverage of growing New Zealand businesses could exclude accounting phenomenon XERO FPO NZ (ASX: XRO). The market's wild enthusiasm for the potential of cloud-based accounting means it now has a market value around $4.7 billion, despite never having made a single dollar in profit. That's more than many established cash-generating machines like Cochlear Limited (ASX: COH), which made an after tax profit of $132.6 million in FY 2013.
Foolish takeaway
The key advantage of holding mid-cap stocks over small-cap stocks in your portfolio is that mid-cap stocks will pay attractive dividends while also offering high-growth potential. Both Trade Me and Kathmandu pay attractive dividends to reinvest and look to be trading on reasonable valuations given future growth prospects.
