The Motley Fool

3 growth shares that could be future blue chips

It’s interesting looking at share price graphs, we get a good picture of how the stock has performed in the past, but that doesn’t really tell us where the share price will go in the future.

So what is a good indicator for the future share price? Some people talk about patterns and support levels, I don’t think this is a good way to generate long term returns.

In my opinion the most effective way is to understand which way the business’s profit is going to go long term. Share prices are always forward looking – if the profit is heading upwards, the share price is going to go up too generally.

The more you consider all the aspects of the business the easier it is to predict the future. Considering factors such as the sector it’s in, whether its profit margins are going up or down, whether its potential market is going to increase in the coming years and so on will help you assess a business.

Here are three businesses whose industry and other factors are all heading in the right direction:

REA Group Limited (ASX: REA)   

REA Group has market-leading websites in Australia and other locations. REA Group, along with Domain, are taking more of the overall property advertising market each year.

There is every chance that REA Group can keep increasing its prices at a high rate for years to come (such last year when it raised prices by 10%) thanks to its market-dominating position.

In FY12 its earnings before interest, tax, depreciation and amortisation (EBITDA) margin was 45%. In FY16 its EBITDA margin was 55%, which is a great improvement.

Not only is it increasing its profitability, it’s also increasing its geographical reach. Last week (10 January 2017) it announced that it intends to acquire a 14.7% stake in PropTiger, a leading real estate platform in India.

REA Group is trading at 30.9x FY17’s estimated earnings with a grossed up dividend yield of 2.04%.

Servcorp Limited (ASX: SRV)

Servcorp offers serviced offices, virtual offices and meeting rooms in key locations around the world including Sydney, Melbourne, Paris, London and Dubai.

By offering quality services and anything a customer may want, Servcorp has grown impressively since it was founded in 1978. Just last year it grew earnings per share by 20%. In FY17 it is expecting to grow profit before tax by 15% and revenue by 8%.

As businesses wants to become more flexible and lower their costs, I can see this service becoming increasingly popular.

Servcorp has maintained or grown its dividend every year since 2010. It’s currently trading at 19.2x FY16’s earnings with a partially franked dividend yield of 2.87%.

Hansen Technologies Limited (ASX: HSN)

Hansen Technologies is a global provider of billing systems for utility companies, telecommunications and pay TV operators with around 200 clients in 40 countries.

Utility companies are one of the most defensive stocks with reoccurring revenues out of all industries. Hansen grew its earnings per share by 42% in FY16 and it could have another strong year in FY17.

Hansen is trading at 24.9x FY17’s estimated earnings with a fully franked dividend yield of 1.87%.

Foolish takeaway

I think all three of these stocks would make good additions to a Foolish portfolio. REA Group is the most likely to fulfil its growth aspirations, but it’s trading at the highest earnings multiple. My order of preference would be REA Group, then Servcorp and lastly Hansen. If these three future blue chips don’t seem attractive, you should consider these blue chips of today instead.

NEW. The Motley Fool AU Releases Five Cheap and Good Stocks to Buy for 2020 and beyond!….

Our experts here at The Motley Fool Australia have just released a fantastic report, detailing 5 dirt cheap shares that you can buy in 2020.

One stock is an Australian internet darling with a rock solid reputation and an exciting new business line that promises years (or even decades) of growth… while trading at an ultra-low price…

Another is a diversified conglomerate trading over 40% off it's high, all while offering a fully franked dividend yield over 3%...

Plus 3 more cheap bets that could position you to profit over the next 12 months!

See for yourself now. Simply click here or the link below to scoop up your FREE copy and discover all 5 shares. But you will want to hurry – this free report is available for a brief time only.

CLICK HERE FOR YOUR FREE REPORT!

Motley Fool contributor Tristan Harrison has no position in any stocks mentioned. 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.