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The hidden profit engines of 3 ASX large caps

Investors often know the main selling points of stocks, and what would make them a good investment at the right price. For example, the big banks offer market-leading yields based largely on profits earned from Australian mortgages and businesses, while the big miners offer diversified exposure to the commodity cycle.

However, it’s often worth looking past the “headline” attractions for a stock in order to see whether it has other advantages that could help it outperform. The three stocks on this list have those advantages.

Bendigo and Adelaide Bank Ltd (ASX: BEN) is one of Australia’s second tier banks, however, it has been marked down alongside the wider banking sector of late.

Alongside its traditional transactional banking and lending activities is Bendigo’s innovative Homesafe product. This product allows home owners to access a guaranteed income stream, in exchange for contractually granting the bank the right to a percentage of the sale proceeds when the home eventually sells.

A product like this is likely to see strong demand from retirees and pensioners who want to unlock the value of their home to fund and enjoy their retirement, without having to sell. Homesafe is currently a unique selling point for Bendigo, compared to its competitors.

Challenger Ltd (ASX: CGF) is another financial services provider catering to the fast-growing retirement and superannuation market. Its headline products are life annuities, which provide income in exchange for an up front capital amount.

However, Challenger also has a fast-growing funds management business, with over $54 billion under management in its two divisions, Fidante Partners and Challenger Investment Partners.

Funds management is an especially attractive business for Challenger to be in as it allows for cross-selling of its products between the higher profile annuity division and the funds management arm. In addition, funds management is highly scalable, with each dollar of additional profit generally requiring less incremental cost to generate.

There’s a good chance that Ltd (ASX: CAR) has the most hidden advantages of any stock on the ASX. The domestic website is obviously the big ticket division, but the company has been quietly spreading its wings in a range of other areas for years now.

While Carsales has numerous investments in international car selling websites, it is the domestically focussed expansions that may be the most interesting hidden assets.

Carsales has moved into vehicle finance through its stake in Stratton Finance, and also through its equity investment in the disruptive peer to peer lender, Ratesetter. Both of these should help Carsales become a significant player in financial services for cars, which would open up an attractive and sizeable revenue stream.

In addition, Carsales is leveraging its knowledge into other related markets, including its website. Tyre sales are higher in both frequency and volume than car sales, and also represent a good revenue opportunity.

Carsales has clearly shown that it is attempting to build its revenue in more stages of the car buying and ownership cycle, and these initiatives are largely hidden behind the dominant website.

Foolish takeaway

Of the three stocks on this list, Challenger looks to currently have the most substantial hidden advantages, while Carsales’ slowly building profit engines could one day drive the company to far greater earnings.

These 3 stocks could be the next big movers in 2020

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Motley Fool contributor Ry Padarath owns shares of Limited and Challenger Limited. 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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