Why WAM Capital Limited is a fan of Afterpay Touch Group Ltd

The top-performing large listed investment company (LIC) is the perfect place to find ideas about which shares could be good options to invest in.

WAM Capital Limited (ASX: WAM) has outperformed the S&P/ASX All Ordinaries Accumulation Index by an average of 7.8% per annum over the last three years, so the investment team clearly know what to look for.

The WAM team have been fans of Afterpay and now Afterpay Touch Group Ltd (ASX:APT) for a while now.

Afterpay Touch Group describes itself as a technology driven payments company with a mission to make purchasing feel great for a global customer base.

Afterpay is altering the retail environment by allowing retailers to offer a ‘buy now, receive now, pay later’ service that doesn’t require consumers to enter into a traditional loan or pay any upfront fees or interest to Afterpay.

It currently has over 1.3 million customers and 6,000 retail merchants on its system. Just a few of its clients include Wesfarmers Limited’s (ASX: WES) Target, Myer Holdings Ltd (ASX: MYR), Adairs Ltd (ASX: ADH), Beacon Lighting Group Ltd (ASX: BLX) and Country Road.

In the first quarter of FY18 Afterpay grew its quarterly revenue by 36.7% from $10.9 million to $14.9 million compared to the fourth quarter of FY17. That’s impressive growth in just one quarter.

Touch offers digital payment businesses servicing major consumer facing organisations in the telecommunications, health and convenience retail sectors in Australia and overseas.

Foolish takeaway

The Afterpay Touch Group share price has grown by just over 100% since it listed in June this year. With the rate of growth it’s achieving, I can see Afterpay being a winner for WAM Capital and other shareholders in the year ahead.

However, my one worry is about the ‘quality’ of the customer base Afterpay is building. If all of its customers are having to rely on Afterpay’s services to afford these products, there could be serious trouble if there’s a recession in Australia.

A much safer bet for growth to beat the index would be these hot stocks.

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Motley Fool contributor Tristan Harrison owns shares of WAM Capital Limited. The Motley Fool Australia owns shares of and has recommended Wesfarmers Limited. The Motley Fool Australia owns shares of AFTERPAY T FPO. 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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