Being Australian, it’s easy to think of certain things only in Australian terms. For instance, we all know intuitively that Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES) dominate grocery retailing in Australia. Both companies may well beat the market over the next decade or more, but there’s only so much their sales are going to grow when there are just 23 million people doing the purchasing. It’s an indirect relationship, but every business is limited by demand for its services, which is determined by how many people want/ can afford such services. Logically, if a business can find new…
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Being Australian, it’s easy to think of certain things only in Australian terms. For instance, we all know intuitively that Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES) dominate grocery retailing in Australia.
Both companies may well beat the market over the next decade or more, but there’s only so much their sales are going to grow when there are just 23 million people doing the purchasing. It’s an indirect relationship, but every business is limited by demand for its services, which is determined by how many people want/ can afford such services.
Logically, if a business can find new groups of consumers to sell to – especially if those groups are larger – profits can really take off. That’s the rationale behind the three growth stocks I’ve written about today, which I believe are some of the best on the ASX:
Carsales.Com Ltd (ASX: CAR) – trades on a P/E of 25, yields 3.4% fully franked
Carsales.Com owns and operates – believe it or not – carsales.com.au, one of Australia’s most popular automotive classified websites. This website is an enormous cash cow and funds Carsales other investments, similar websites in South Korea, Mexico, and Brazil that are growing at a decent clip and moving towards profitability.
Internationally, Brazil, South Korea, and Mexico have a combined population of 370m and plenty of room to grow over the long term, lower levels of individual wealth notwithstanding.
It took Carsales the better part of 20 years to become market leader in Australia and start offering value-adds like vehicle inspections and financing, meaning replicating its success overseas might take a similar length of time. So while it won’t shoot the lights out overnight, Carsales has outstanding growth potential over the long term both by expanding the number of users, and increasing the services offered to those users.
I would invest a hypothetical $3,000 into Carsales.Com Ltd.
REA Group Limited (ASX: REA) – trades on a P/E of 34, yields 1.6% fully franked
REA Group is in the house rental business and, similar to Carsales above, uses its flagship realestate.com.au website to fund investments in Italy, Luxembourg, France, Germany, China, and the US. REA Group also has a part-shareholding in iProperty Group Ltd (ASX: IPP), which operates property portals in south-east Asia.
Backed by News Corp (ASX: NWS), REA Group is aggressively targeting global property advertising revenues and leverages the number of visitors to its websites to achieve quicker outcomes for rental agents and earn fees in return.
More rental agents use the website in the hopes of attracting tenants, leading to a wider variety of properties being listed, which in turn leads to more prospective customers, which in turn leads to quicker sales and attracts more properties.
It’s a powerful cycle of growth and with a number of potential markets to grow in, REA Group is quite possibly the best growth stock on the ASX. Don’t be put off by the price tag – I would invest a hypothetical $3,000 into REA Group.
SEEK Limited (ASX: SEK) – trades on a P/E of 17, yields 2.5% fully franked
Last but far from least, Seek may actually be the most attractive stock in this article as a result of its comparatively low share price, which is down 18% for the year. Seek operates employment classifieds website seek.com.au and has expanded into a number of geographies and parallel industries such as education – a non-core segment which it is now selling.
Like Carsales and REA, Seek leverages the success of its domestic businesses to fund similar investments overseas in Mexico, Brazil, and China as well as elsewhere in Asia. SEEK does have a high level of debt, although the sale of its education business and continued growth overseas are likely to mitigate this over time.
SEEK has network effects and international exposure similar to REA and Carsales, and is another strong contender for one of the best growth stocks on the ASX. I would invest a hypothetical $4,000 into SEEK Limited.
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Motley Fool contributor Sean O'Neill owns shares of carsales.com Limited. 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 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.