We’ve all been taught to diversify our portfolios, to capture the best of all worlds and limit our downside risk. However, it’s also important to balance your portfolio with a mix of large and small caps, so you can reap some explosive growth potential.
However, investors must be aware that these smaller, high risk companies need to make up a small portion of your invested capital, given their risky nature. So here are four solid companies that I’ve identified as potential candidates for a well balanced portfolio.
1. BHP Billiton
Diversified mining giant BHP Billiton Limited (ASX: BHP) has once again released spectacular results, lifting its full-year net profit by a whopping 23% compared to FY13. What was most interesting about its results was the planned demerger of some of its non-core assets, to simplify its portfolio structure and focus on its specialties such as iron ore and copper production.
As Australia’s largest mining company BHP comes with special perks such as a low cost base, allowing it to drive out smaller competitors. Its incremental cost of iron ore production of US$50 per tonne, allows it to maintain profits even in a tough environment.
BHP trades on a solid price-to-earnings ratio of 13.95 and offers a tasty 3.5% fully franked dividend yield. So if you’re looking for some quality blue chip growth at affordable prices, then BHP takes you one step closer to financial freedom.
2. M2 Group
Telecommunications provider M2 Group Ltd (ASX: MTU) has been the talk of the month, growing profits by 60% in FY14. Despite these gains, M2 trades on an attractive valuation and I think it’s still not too late. M2’s main ingredient for outstanding growth has been its ability to hand-pick quality acquisition targets such as Dodo, and these acquisitions have definitely paid off, big time!
Furthermore, its recent shift into the energy industry gives it an outstanding opportunity to make its magic work again. By providing low cost energy sources, M2 will secure itself a multitude of long-term tailwinds. In its most recent report M2 was confident that these new businesses will help to drive its future growth.
Diversified financier FlexiGroup Limited (ASX: FXL) serves well known names such as Harvey Norman Holdings Limited (ASX: HVN) and JB HI-FI Limited (ASX: JBH). Earlier this year, FlexiGroup shares were smashed, but it is starting to gain some ground as investors realise the stunning growth potential it has. FlexiGroup has recently undertaken a wave of restructuring measures to ensure a more efficient business. These primarily involve boosting IT investments until FY15 and making “growth by acquisitions” a medium-term strategy.
Sitting on a price-to-earnings ratio of 13.67 and offering a juicy 4.4% fully franked dividend yield, FlexiGroup is my preferred exposure in the financial sector and will definitely sweeten your balanced portfolio.
4. Hansen Technologies
To add that extra bit of spice to your balanced portfolio, you need a smaller company that has the potential to provide some explosive growth. That’s why you need a booming technology company like Hansen Technologies Limited (ASX: HSN). Hansen provides utility, billing and smart metering solutions for the electricity, gas and telecommunication sectors. It’s recently had an outstanding run, with its share price gaining almost 45% in the last year. However, I think Hansen is full of long-term tailwinds that have the potential to drive some more growth. Especially given its recent contract with DIRECTTV Latin America, this provides Hansen with a seven-year licence agreement for the use of its Customer Care and Billing solutions.
Hansen trades on a modest price-to-earnings ratio of 16.04, but what really caught my attention was its 4.1% fully franked dividend yield, which is good for such a small company.
Buy, Hold or Sell
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Motley Fool contributor Aryan Norozi does not own shares in any of the companies mentioned in this article.