These 2 stocks could triple in 5 years!

While blue-chips appear overvalued, these stocks appear ripe for the picking!

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Since interest rates began dropping to 2.5%, the Aussie stockmarket has performed very well. Unsurprisingly, the S&P/ASX 200 (ASX: XJO) (^AXJO) has been led higher by strong performances of well-known high yielding blue-chips such as Commonwealth Bank of Australia (ASX: CBA) and Woolworths Limited (ASX: WOW).

CBA XJO WOW
Source: Google Finance

These stocks, among other things, have been pushed higher by their perceived level of safety and brand value but, in my opinion, have become somewhat overvalued and do not represent a ‘bargain’ at current prices.

Fortunately, now that confidence is on the rise, many investors are recognising the need to look further down the market capitalisation ladder for top growth ideas. In the small cap space, a number of compelling investments exist.

The first of which is Cash Converters International Ltd (ASX: CCV). Cashies’ share price was rocked after the government changed the regulations surrounding fees on small, short-term loans. Something which accounted for a hefty portion of the company’s earnings.

As a result the share price nosed dived late last year, falling around 50% during the 2013 calendar year. But since December, shares are up 35% and counting. The turnaround has come because investors have been reminded of the strength of Cashies’ brand and market position both here in Australia and the UK.

Many investors may not know there are more stores in the UK than in Australia and most stores in New Zealand are independently franchised (or owned by a master franchisor). However the ASX-listed entity has big plans for our overseas neighbour.

Recently, Cashies invested $5 million in the New Zealand Cash Converters Master Franchisor and agreed to lend an additional $15 million to expand and develop the store network. New Zealand provides a unique opportunity for the second-hand goods dealer. It plans to grow the current store count from 14 to 50 in the next five years!

In addition, the company also recently announced a joint venture (JV) with EZCORP Inc to launch the Cash Converters brand in South America and Mexico. EZCORP will take an 80% interest in the company in exchange for a master licence and technology support and employee training.

Outside of the franchised store network, Cash Converters is getting innovative with lease/rental products such as its Carboodle business. It allows customers to buy a car with EVERYTHING for one weekly payment. Insurance, servicing, tyres, registration, warranty and roadside assistance in one easy payment. As you can imagine the service is growing rapidly.

Another small-cap stock with loads of potential is recently listed Shine Corporate Ltd (ASX: SHJ). Like Cashies, it is leveraging its brand name and reputation for quality service to expand its footprint. Although it’s a dominant legal firm in Queensland (with around 24 offices), Shine’s exposure in the bigger markets of New South Wales and Victoria is only just beginning with five or less offices.

Like rival Slater & Gordon Limited (ASX: SGH), Shine specialises in personal injury. However recently the group has opened the door to a number of emerging practice areas such as disability insurance, superannuation, professional negligence, class actions and landowner rights. These accounted for 12% of total revenue in FY13.

In the first half of 2014, revenue jumped 16%, net profit after tax (NPAT) increased 42%, EBITDA increased 42% and the EBITDA margin improved by just under five points to 31.3%.

With the balance sheet potential to grow organically and acquisitively, the founder-run management team have not ruled out the opportunities for further investments in 2014. Guidance for this year is $115 million in revenue and an EBITDA margin between 34% and 37%.

Foolish takeaway

Currently priced at $1.04 per share, I believe Cash Converters is a real long-term bargain which has significant upside potential in the next five years. With healthy balance sheets, strong cash position and a 3.8% fully franked dividend, Cashies is not trash but treasure.

Priced at 16 times earnings (or $2.37), Shine’s share price is not demanding and likely to grow strongly in the next five years. It’s reassuring management continue to hold a majority of shares in the company but it can make trading them slightly illiquid. Despite this, it could be a worthy addition to long-term investors’ portfolios.

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Motley Fool Contributor Owen Raszkiewicz owns shares in Slater & Gordon, Shine Corporate and Cash Converters. 

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