Many investors are drawn to owning blue chip stocks. This is completely understandable given their generally solid balance sheets, commanding market share position and maintainable earnings. However, while these top tier companies have many attractive attributes and characteristics, it is often the lesser known, second tier or perhaps even third tier businesses that can prove to be the more profitable investments.
For example, consider the performance of telecommunication giant Telstra Corporation Ltd (ASX: TLS), which has gained nearly 100% in the past five years. That’s a massive outperformance compared with the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) which has gained 12.5% over the same time period. However there are a number of growth stocks that leave even Telstra in their wake.
Consider the following three stocks…
- Sticking with the telco sector, investors who have sought out smaller, growing competitors to Telstra have fared very well. Take, for example, TPG Telecom Ltd (ASX: TPM) whose share price is up a massive 650% over the past half-decade.
- Technology has been another exciting sector for identifying high-growth stocks. Hansen Technologies Limited (ASX: HSN) is a leading provider of billing solutions software to major utilities such as those operating in the telco, electricity, gas and water sectors. Hansen’s share price has soared 276% in the last five years.
- Australia’s generous superannuation system has created a tailwind for the financial services sector which has benefitted many operators. One of those beneficiaries has clearly been Magellan Financial Group Ltd (ASX: MFG) which has witnessed strong demand for its products and in turn shareholders have enjoyed a near 1,900% rise in their share price.
Investors prepared to experience a slightly higher level of risk also have the potential to experience higher returns.
Motley Fool contributor Tim McArthur has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia owns shares of Hansen Technologies. 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.