Retail companies are disappointing businesses running on paper thin margins. Mobile and broadband companies are too competitive to really make money in the long term. These might be common opinions among some investors, but could they keep us from finding good stock picks right in front of us?
One trick for getting past our pre-conceived ideas about a stock is to answer two questions about the company's performance.
If it is facing some problems, are they structural (outside of the company's control and not likely to change) or temporary (current market conditions, subject to change). When it is only temporary, that's when we can pick up bargains on good companies.
Also, where is the company in its own "cycle of life"? Is it a start-up, a growth machine, a mature business or a company in decline. Knowing that alone may help you understand what to expect from the company. No one is expecting telecom giant Telstra Corporation Ltd (ASX: TLS) to grow by 20% – 30% annually like some fast grower. However, we do expect stable growth and good dividends from it- which it delivers very well as a mature business.
Here are two stocks that I believe can grow well from here, because both are still in their growth phases and don't face big structural problems.
— JB Hi-Fi Limited (ASX: JBH)
The electronics retailer with a very recognisable brand name is still in its growth stage, but is also expanding its business by selling home appliances and white goods. It has performed much better than a number of retailers because the growing housing market usually spurs on purchases of its goods for new homes.
Retail trade in general isn't exceptionally strong currently. However, interest rates are low, so that will keep house hunters busy and JB Hi-Fi will continue to benefit.
— M2 Group Ltd (ASX: MTU)
The company operates such broadband, mobile and business communications service providers as iPrimus, Dodo and Commander. It is currently in a strong "growth through acquisition" phase that has stepped up revenue, earnings and its share price incredibly over the past five years.
It is also moving into utility payments services to bundle its products and create stronger customer relationships. It does face competition from iiNet Limited (ASX: IIN) and TPG Telecom Limited (ASX: TPM), but if it can keep up a steady number of acquisitions without overpaying, I think it can grow its way to the top. Consolidation in the mobile and digital communications industry is pretty constant and can open up opportunities for M2 Group.
