Buy these 3 shares for strong diversification

If you look at most retail portfolios they likely have far too much allocated to the big stocks of Australia. Commonwealth Bank of Australia (ASX: CBA), Australia and New Zealand Banking Group (ASX: ANZ), National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC) and Telstra Corporation Ltd (ASX: TLS) feature too heavily.

Diversification is an important part of any investment strategy. A property investor’s strategy wouldn’t be to buy all of their investment properties on the same street.

The same consideration needs to be made about shares. Investing most of your portfolio into the almost-identical big four banks probably isn’t a good idea.

Expanding beyond banks doesn’t mean you need to buy penny stocks or small caps, there are still some very large businesses out there that should be quality additions to any portfolio.

Here are three shares that could make good additions:

TPG Telecom Ltd (ASX: TPM)

TPG has grown into Australia’s second largest telecommunications business after good organic growth and making smart acquisitions such as iiNet.

The share price has fallen heavily over the past couple of years from $12.54 to today’s $6.53. Long-term shareholders are nursing falls of nearly 50%. However, today’s price could be a decent opportunity to buy into a long-term growth idea.

Data usage is growing exponentially every year and most people would now value their internet bill almost as highly as other utilities, TPG has fairly defensive earnings. There’s a good chance that TPG’s new mobile networks in Australia and Singapore could spur the next stage of growth.

TPG is currently trading at 16x FY18’s estimated earnings.

Cochlear Limited (ASX: COH)

Cochlear is one of Australia’s leading healthcare companies. It designs, manufactures and supplies the Nucleus Cochlear Implant, the Hybrid Electro-Acoustic Implant and the Baha Bone Conduction Implant.

People usually value their health above most other things in life, so they’re willing to pay what it takes to improve themselves. Cochlear offers life-changing products to people, so they’re very likely to keep paying for the product over their lives.

Cochlear is one of the most international companies on the ASX with only 17% of revenue coming from Australasia & Asia.

The share price has performed strongly over the last year, which is why the shares are currently trading at 39x FY18’s estimated earnings.

Class Ltd (ASX: CL1)

Class offers cloud accounting software for self-managed superannuation fund (SMSF) administrators.

Many accountants and SMSFs are making the switch to cloud accounting because it offers real-time reporting and much better tools, which are automated.

I like Class’ potential because of the amount of non-SMSF portfolios out there that could benefit by being on Class’ software. ‘Class Portfolio’ is only just being rolled out and could grow into a large part of earnings for the company over time.

Class is currently trading at 35x FY18’s estimated earnings.

Foolish takeaway

I believe all three shares have solid long-term futures, but I’m not sure that Cochlear is good value today. If I had to pick one, then I’d choose Class because of its dependable subscription cashflows and potential growth over the next couple of years.

This share would also be the perfect way to diversify your portfolio, it’s growing in Asia and has a good dividend yield.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited and TPG Telecom Limited. The Motley Fool Australia owns shares of Class Limited and National Australia Bank Limited. The Motley Fool Australia has recommended Cochlear Ltd. 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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