Finding companies at the beginning of a long, upwards growth trend is like Nirvana for most investors –assuming that after identifying the opportunity the investor actually purchases the stock and then hangs on for the ride as the company grows.
A business strategy which has a somewhat chequered history but which is proving to be profitable in the following examples is a consolidator (also called roll-up) strategy. A consolidator is generally a firm that identifies an opportunity to "corporatise" an industry and thereby create economies of scale with flow-on efficiencies and profits.
Recent hiccups have meant that the following three companies have all underperformed the index over the past year. However, even these recent set-backs haven't dented the medium-term outperformance. More importantly, the recent share price weakness, could offer investors an appealing buying opportunity…
Here are three companies which have, in recent years, moved to consolidate their respective industries.
Roll Up, Roll Up
Capitol Health Ltd (ASX: CAJ) is a Melbourne-based firm with a market capitalisation of $274 million. The firm is engaged in providing radiology services and sees considerable opportunity to further consolidate a fragmented Victorian industry in which it has built a market-leading status.
Greencross Limited (ASX: GXL) began life with the aim of being Australia's leading veterinary group. Having been established in 1994, the firm has since acquired and integrated over 100 veterinary practices, laboratories and pet crematoria across the country. In more recent times the group's ambitions have extended to the wider pet care industry with the company now a major retailer of pet products and boasting a market capitalisation of $763 million.
In less than a decade G8 Education Ltd (ASX: GEM) has grown into a $1.1 billion company. The firm initially saw the opportunity to consolidate single-centre child care operators which were becoming increasingly burdened by government regulations. Since its formation in 2006 the company has acquired hundreds of centres across the country including from multi-centre owners.
Impressive outperformance
To highlight the kind of growth trajectory these three stocks have achieved, consider the share price growth of each stock over the past five years which includes a recent period of poor performance in each case. Capitol Health is up 1,212%, Greencross is up 890% and G8 is up 293%. In comparison, the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has gained just 12.5% over the last half decade.
The key to finding companies with high-growth potential is to look at the smaller end of the market. It is rare that large blue chip stocks which already command major market share can ever achieve fast growth rates. In contrast, small companies can potentially grow at fast rates for a long time given their humble beginnings.
