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SEEK Limited and REA Group Limited: Fast growers that could double in 5 years

Over the past five years 28 of the companies in the S&P/ASX 200 Index (ASX: XJO) have more than doubled in share price. That would be a compound annual return of more than 15%. Some may rise on market hype for a while, but over time the rise in share price is correlated to company earnings growth.

When looking at current fast growers, keep in mind they may not maintain very high growth rates indefinitely as they mature as businesses. That’s why we can set a goal of finding companies that could possibly double their earnings over five years.

During that time they could also slip a little, so if we will limit our choices to companies that have earnings growth rates well above 15%, then they can still possibly hit the target. That’s a “margin of safety” for our expectations.

These fast growing stocks have definitely surpassed the 15% annual earnings growth mark and still have the capability to continue on from here.

—   REA Group Limited (ASX: REA)

The earnings keep piling up at Australia’s number one property search website, realestate.com.au. It has such a strong brand name and the ability to charge premium prices that even real estate agencies are concerned it has too much pricing power.

This month it announced that in FY 2014 it achieved earnings growth of 36%, on par with its past 10-year annual compound average. That came from a 30% rise in revenue. The stock was sold off 8.6%, possibly from investor concern of future earnings growth. High-flying growers with high price-earnings ratios (like this company’s 36 PE) can be sold off quickly due to market expectations being disappointed. Even if it slowed down to 25% – 30% earnings growth, it would be well above our 15% growth rate.

—   SEEK Limited (ASX: SEK)

In the last three years the pace of earnings growth has really picked up for the leading job search website seek.com.au. One reason for that is its expansion strategy into Asia, where it already has subsidiaries in Singapore and Kuala Lumpur. It is the majority shareholder in China’s leading job portal Zhaopin, which it plans to float on the New York Stock Exchange soon. It is establishing itself as a major education and training service provider as well.

FY 2013 full year underlying earnings were up 34% and its half year underlying earnings rose 29%. The company would be another good candidate for our 15%+ growth search.

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These stocks have great growth potential. I prefer REA Group because of its brand strength and pricing power that are protective "moats" around the business. However, a balanced and diversified portfolio should also have good paying dividend stocks.

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

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