Despite September's pullback, Australian share investors have enjoyed a stellar run over the last two years, with the ASX All Ordinaries returning more than 30% excluding dividends since 1 July 2012.
But with the banks, healthcare, and telecommunications sectors among those priced at near irrationally jubilant prices based on future earnings, Foolish investors should consider exercising caution in maintaining margins of safety between the prices paid for companies and intrinsic values.
Credit Corp Group
There's a lot to like about Australian market-leading debt collection company, Credit Corp Group Limited (ASX:CCP).
For one, it maintains the highest margins in the sector – over the last five years it generated a 22.3% return on equity (ROE) compared to the industry average of less than 13%. (Incidentally, the ROE for Australia's banks over the last five years is less than 15%).
Likewise, it has nearly a third less debt than the industry's second-largest player, Collection House Limited (ASX: CLH), at 24% debt-to-equity compared to 65%, respectively. This is especially important for the collections receivable industry, as a strong balance sheet means that at times of market crisis, distressed debt purchasing opportunities arise at bargain prices for those companies that are able to take advantage.
Credit Corp also has diversified revenue streams. In the last 18 months, it has entered into personal financing, providing secured and unsecured loans to individuals with poor credit histories (e.g. its own receivables customers). It has also seen its gross loan book increase from $19 million to $63 million in that time.
Expansion in the competitive U.S. market is also underway, although due to a new regulatory environment, prices remain below Credit Corp's return targets, so the company is making "selective purchases at compromised returns" until conditions moderate.
Reasonably priced at 13.3 times earnings, Credit Corp is well placed to outperform the market given its conservative management approach, growth trajectory and high returns on capital invested.
Bentham IMF
The father of modern economics, Adam Smith, was all too aware of the major business entities of his time engaging in behavior that amounts to "conspiracy against the public". The business entities of Smith's time were the "merchants and master-manufacturers". Unfortunately the same case could be made for some business entities in the current environment.
Witness recent corporate events such as the major U.S. ratings agencies failing to recognise the risks that led to the GFC.
Similar clangers can be found closer to home: major Australian banks have been taken to task over 'excessive' fees; corporate failures have emerged such as Forge Group, and dams have flooded in the case of Wivenhoe.
Putting pressure on the above-mentioned corporate malfeasances is Australia's largest litigation funder, Bentham IMF Limited (ASX: IMF).
Due to the nature of litigation, profits will always be lumpy, and as Peter Anderson points out, given Bentham IMF's net profit was down 29% in 2013-14, investors should not be put off by its lofty 32.9 trailing earnings multiple.
To wit, Bentham IMF is one of the few companies that thrives in recessionary environments—from the peak of the GFC in 2008 to 2010, its share price increased nearly fourfold, compared to the ASX All Ordinaries, which fell 18%.
Bentham IMF boasts a strong balance sheet (including $100 million in cash at the bank—important to intimidate defendants and competitors alike), high five-year returns on equity just south of 20%, and a market-leading position in Australia. It's also busy expanding its services in America, Europe, and Asia.
Intelligent investing requires two key elements: appropriately evaluating underlying or intrinsic value, and paying the right price. I'd argue that Bentham IMF deserves a place in any growth investor's portfolio.
Also representing exceptional value for money is The Motley Fool's Top Stock Idea for 2014.
