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4 great growth stocks to buy for a lucky little one today

There are multiple reasons why someone might want to make a very long-term investment. Many invest part of their self-managed superannuation fund in shares, and for those not paying off a mortgage, it makes a lot of sense to own (parts of) a few businesses, rather than keeping cash in a low interest rate term deposit. Commonly, parents or grandparents like to put a little aside for the young ones in the family. This is an ideal situation, because it enforces a long-term view.

If you’re investing for a two-year-old, you’re looking at the likely return in 15 – 20 years. In my view, such long-term investors should seek a business that has a very low risk of resulting in capital loss, and is likely to be much more profitable in 15 – 20 years. Therefore, it’s particularly important to look for a diverse bunch of high quality businesses that have plenty of room to grow. Here are my five favourite picks for a 20-year time horizon.

CSL Limited (ASX: CSL)

CSL is my preferred blue-chip stock and it’s the only blue-chip I’ll be picking for this buy-and-hold portfolio. That’s because I have a high degree of confidence that the company’s products will still be in high demand in 20 years. In fact, because of the ageing population, I think CSL will be selling more than ever. For example, one of its newer products, Kcentra, is specifically designed for those taking the anti-coagulant Warfarin. Generally speaking the company’s (global) size is a competitive advantage, but because the world has so many sick people in it, it still has plenty of room to grow.

1300 Smiles Limited (ASX: ONT)

The vast majority of professional investors I speak to are of the opinion that 1300 Smiles is too expensive. Indeed, since I first bought the stock in 2012, it has arguably  been consistently expensive. Unusually, the company has remained “expensive” even despite a significant drop in profits, caused by the closure of the Chronic Dental Disease Scheme. Usually when growth companies go backwards, the market punishes the stock price viciously.

The holding has not been the star of my portfolio, but I’m happy to hold for the dividend. I expect the shares will yield 2.1% – 2.5%, fully franked for FY 2014, and I expect this dividend to grow over time. The downturn in the dental industry seems likely to encourage high-quality operators to sell their practices to the company, in order to get an edge over the competition.

Fortunately for shareholders, the company has just bought a practice in the lower north shore of Sydney. To quote the managing director Dr Daryl Holmes: “The practice was established 60 years ago by the father of the principal dentist, and was relocated to its current location in the early 1980s. The practice has recently been fully renovated, and is now a modern, beautifully appointed, fully computerised and almost paperless practice.” My reading of the situation is that 1300 Smiles will free up the principal to focus on what he does best (and provide him with some upfront figure). 1300 Smiles gets the benefit of a top dentist and the opportunity to increase revenues coming into the practice. I expect this kind of transaction to be repeated consistently for the next 20 years (and I wouldn’t be surprised if the company gets even better at it, over time.)

Energy Action Limited (ASX: EAX)

Energy Action is an energy efficiency company and an energy broker that also sells energy-use-monitoring services. The company’s results for the first half of FY 2014 disappointed, sending the share price down to recent lows of around $3.10 (I sold some of my shares after those results, at around $3.40).

The key reason that the results disappointed was that the company was unable to grow revenues from the energy solutions division at the expected rate. Having worked in the rooftop solar and energy efficiency industry, I have to say that I think management’s projections were extremely unrealistic; energy efficiency businesses are quite vulnerable to regulatory changes, given that grants programs are one of the main drivers of demand. I also believe the company wasted money on a review of its energy efficiency business, and changing the name of that business.

Having said all that, the current CEO, Scott Wooldridge, is new to the job, and deserves a decent period of time before being judged. One of the first moves shareholders have seen from him is the acquisition of Exergy, which has sent the share price back up to around $3.40. The announcement makes much of the fact that the founder of Exergy, Dr Paul Bannister, will be joining the team.

According to Mr Wooldridge, “Dr. Paul Bannister will lead the Sustainability Solutions division. Paul is well known in the energy management sector and was the original technical developer of the NABERS Energy and Water Ratings. The intellectual property that Paul and his team bring to EAX gives us a major competitive advantage.“ I like Energy Action because as gas prices rise, I expect demand for energy brokers to increase. In the long term, the energy efficiency expertise should also pay off. 

Bentham IMF Limited (ASX: IMF)

Bentham IMF is one of the most enjoyable stocks to own, because the litigation funder generates constant chuckles for the long-term shareholder. When the company announces a settlement or win, the stock price usually goes up, and whenever it announces a potential or real loss, the stock price goes down. This kind of erratic market pricing is quite amusing, because no single result defines the value of the company.

Rather, long-term shareholders are relying on the continuation of proven risk management abilities. While there is some risk that the company’s processes and risk management will not translate to the US, where operations have begun recently, I think that it’s fairly likely that the Australian business will grow over the long term. This limits the downside, in my opinion.

Foolish takeaway

These four stocks are companies that I think will grow their businesses quite significantly over the next 20 years. I also believe that the chances that the businesses will decline are quite low. However, each one of these companies are quite expensive, so there is a significant amount of growth already priced in. Importantly, each of these companies has plenty of room to grow. If I wanted to buy (more) shares in any of these companies, I’d try to buy on share price weakness – no need to rush. If you’re saving for a little one, dividends should go into a “high interest” bank account, until they are sufficient to be reinvested.

Personally, my average buying price for Bentham IMF was around $1.70, I wouldn’t pay more than about $3.25 for Energy Action, I think 1300 Smiles shares might well go as low as $5.80 in the near term, and I’d want CSL to drop to around $65, before I’d buy shares. However, I actively manage my portfolio. For someone looking to “set and forget” for 20 years, I think these companies are top-notch options. Indeed, these companies are quite established compared to some of my favourite speculative stocks.

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Motley Fool contributor Claude Walker (@claudedwalker) owns shares in Bentham IMF, 1300 Smiles and Energy Action. He welcomes feedback in English, French or Spanish.

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