When investors have a list of things they look for in a stock, there may be a lot of statistics and ratios, but it can pretty much boil down to a few essentials – growing business, high profit margins, lots of extra cash and a protected market space. Two stocks that immediately come to mind matching those are REA Group Limited (ASX: REA) and SEEK Limited (ASX: SEK).
Here are some reason why these high-performing companies are still going strong and have great opportunities to grow from here.
1) Market leading barriers to entry
Realestate.com.au, REA Group’s property website, has grown to become the nation’s number one online real estate listings market leader, surpassing domain.com.au, which is owned by Fairfax Media Limited (ASX: FXJ). It can be hard to displace a leader because of the general popularity. Property sellers want to be on the site that gives them the best chances to sell their home. Real estate agents want to have their listings on the best site to get the best market exposure.
The Seek job listings site is the same. Employers and applicants want the best exposure and widest choice of jobs, so market-leading Seek has strong barriers to entry for competitors.
2) High profit margins provide funds for expansion
Because it is an internet website, the operating costs are not as heavy as a manufacturer or resources company. More money can fall to the bottom line and profit margins are high. The extra cash can also be used to fund growth while competitors have to survive on thinner margins.
3) Warren Buffett’s “streams of revenue”
Warren Buffett, one of the most successful investors of our time, loved newspapers because of their control of ads and readers’ “eyeballs”, which created multiple streams of revenue. Seek and REA Group are similar.
Advertisers want to be seen on their sites, viewers constantly visit the sites and the two companies can offer various services that generate more income.
4) Putting experience and expertise to use overseas
Both companies are now expanding overseas even though there is still room to grow within Australia. They can take their marketing and internet expertise and duplicate their success in regions like Asia that are developing quickly.
REA Group just announced that it will advertise its Australian listings through a Chinese real estate website called Soufun.com, in addition to the two other China-based websites it currently does this with. Australian properties are very popular for Chinese buyers and REA Group can establish its brand there more.
Seek has businesses and investments in other employment websites in Malaysia, Singapore, Indonesia and the Philippines to help maintain its high growth and profit margins.
The two stocks come at a premium price. Their price-earnings ratios are high, but that reflects their high growth rates. If they can keep it up, then share prices can still rise, potentially giving investors a good return. If a market correction comes, it may provide an opportunity to start a position at a discount.