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My favourite ASX stock

In what I can only assume is an expression of his world-renowned sense of humour, Bruce Jackson recently tapped me for the honour of contributing to Motley Fool Take Stock.

But as the Investment Research Analyst for Motley Fool Hidden Gems, I’m not blessed with the ability to captivate instantly or amuse from the outset.

What I can offer though is a passion for small-cap growth stocks and a first hand knowledge of the inside workings of the Motley Fool Australia investment team.

So I’ll cut to the chase and talk from the heart. I’ll tell you about the biggest holding in my own personal share portfolio. After all, I like to put my money where my mouth is.

And it’s a good story too, this fast growing company at the intersection of software-as-a-service and healthcare, two booming industries.

I’m talking of Pro Medicus (ASX:PME). Its booming share price has seen it rise to 11.3% of my share portfolio.

Eleven months ago, my friend Andrew Page — Advisor at Motley Fool Dividend Investor — called it “one ‘gunna’ company that can” and stated categorically that:

Growth expectations here are not ungrounded, with some recent large contract wins in the lucrative US market…These wins will not only underpin revenue for some time to come, but importantly they effectively promote the value and attractiveness of Pro Medicus’ systems for its clients, and act as a meaningful foot-in-the-door to the US market.

And boy, have those words turned out to be prescient.

Since then, Pro Medicus has won three major contracts in the US, worth around $25 million, and its share price is up from under $1.20 back then, to over $2.90 today! You do the math.

But even after that rise, I’m not thinking of selling my Pro Medicus shares. In part, that’s because the company benefits from honest and competent board members, including a founder-CEO who personally owns a large number of shares.

At the end of the day, I wish I owned more Pro Medicus shares, but I can’t bring myself to chase the share price right now. After all, it’s up 50% in just a couple of months… and I prefer to buy during a jittery market, if I can.

But I do try to let members know when I’m a buyer. For example, I started a thread on our members only discussion forums last year about ethical investing, suggesting Pro Medicus was a likely market beater. From an ethical viewpoint, I was satisfied that the company was improving healthcare systems.

I’m not too classy to quote myself, so here’s what I said to members (before the share price doubled in less than a year):

I like the company because a large portion of revenues are recurring in nature. Also, the system is perfect for an environment where medical image file sizes are continually increasing, because it allows physicians to view the images without downloading them to their particular device.

A Small Cap Company Flying Under The Radar

I almost choked on my biodynamic chardonnay the other night when I saw Pro Medicus’ CEO Sam Hupert appear live on ABC’s The Business. I guess you could say that the company is becoming well known.

So it’s only right that I also mention one of my investments that is still flying under the radar…

Take, for example, SDI Limited (ASX:SDI), a manufacturer of dental products such as amalgam for fillings and tooth whitening products. It’s managed to gradually grow revenue over the years, and it exports to four corners of the globe.

However, its founding family completely control the company, and it’s renowned for its poor communication with shareholders. And I doubt the non-descriptive company name helps much either.

Yep, you’ve guessed it — it’s basically the opposite of Pro Medicus. Kind of boring, not well known, and certainly not ‘hot’.

But it has one thing going for it — it is attractively priced.

For example, last year it made $6.2 million in profit, and produced $3.2 million in free cash flow. Its current market capitalisation is $68 million, putting it on a P/E ratio of about 11, and about 21 times free cash flow.

I own SDI because free cash flow could increase significantly if and when the company slows down on capital expenditure. On top of that, the company has said that it expects new “Brazilian operations will reduce its inventory levels as it can now implement a ‘just in time’ inventory management system.”

If this happens it will be a significant improvement for the business, and may release some of the $16.5 million in capital currently tied up in inventory.

That would be a happy day for shareholders, since it could leave the company flush with cash and in a strong position to eliminate all debt, and increase its dividend further.

An even better bargain

But while SDI is fairly cheap, it’s not nearly as undervalued as a subscription to Andrew Page’s Motley Fool Dividend Investor service.

There are few better things in an investor’s life than a cheap company growing its profits AND its dividend, even better if that dividend is also fully franked.

I’m not talking about low growth companies either — the usual high yielding suspects like Commonwealth Bank of Australia (ASX: CBA) and Insurance Australia Group (ASX: IAG).

Andrew goes “underground” in his search for the great dividend stocks of tomorrow. Not quite as underground as SDI, but deep into under-followed and under-loved ASX companies.

His recently released Best Buys Now stocks are a case in point. Trading on grossed up fully franked dividend yields of 6% and 11% respectively, based on their growth prospects and superior dividend yield, these two “recession resistant” stocks look to have been completely over-looked by the mainstream media and analysts.

Their loss just might be Motley Fool Dividend Investor subscriber’s gain.

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Motley Fool contributor Claude Walker owns shares in Pro Medicus and SDI. You can follow him on Twitter@claudedwalker. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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