Why SEEK Limited and REA Group Limited are hot money spinning stocks

They have the four things investors look for in great stocks.

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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.

Motley Fool contributor Darryl Daté-Shappard does not own shares in any company mentioned. 

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

asx share price competitions represented by businessmen arm wrestling
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

person reading news on mobile phone
⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »