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Buy these 3 shares for instant diversification

Don't put all your eggs in one basket...

Most investors are heavily exposed to the big four banks of Commonwealth Bank of Australia (ASX: CBA), Westpac Banking Corp (ASX: WBC), National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ).

This overexposure could be through a direct portfolio, the big listed investment companies (LICs) like Australian Foundation Investment Co. Ltd (ASX: AFI), Australian index funds like Vanguard Australian Share ETF (ASX: VAS) or through a super fund.

I strongly believe that investors need to diversify their portfolio away from the big banks towards smaller businesses that are growing.

Here are three shares I’d buy to diversify my portfolio:

Challenger Ltd (ASX: CGF)

Challenger is Australia’s largest provider of annuities, its fastest-growing client base is Australia’s retirees who are looking for a secure source of income from their capital.

It has strong tailwinds because the number of people over 65 is expected to grow by 75% over the next two decades, which will give Challenger a lot of potential customers.

I much prefer Challenger as a finance stock to the big four banks. Challenger is currently trading at 20x FY18’s estimated earnings.

Class Ltd (ASX: CL1)

Class is a leading cloud accounting software provider for self-managed superannuation funds (SMSFs). Class has steadily grown its market share thanks to its automation and clever tools, allowing SMSF administrators to make a decent profit for the work they do.

The business also has another product called Class Portfolio which is for non-SMSF share portfolios. Class believes there could be as many non-SMSF portfolios as SMSFs, meaning there’s an opportunity to perhaps double the size of its potential client base.

Class is currently trading at 45x FY17’s earnings.

Bapcor Ltd (ASX: BAP)

Bapcor is the leading auto parts provider in Australia and New Zealand. Burson is its main brand, it mostly serves mechanic businesses with two-hour delivery and specialised services. Burson is generating good same store sales growth and has plans to boost its number to 200 stores.

Management have done a good job of acquiring businesses to grow the company’s whole offering and then increasing profit margins with the integration. Bapcor management predict that net profit after tax will grow by 30% in FY18.

Bapcor is currently trading at 25x FY17’s earnings.

Foolish takeaway

I think all three of these businesses are quality businesses. At the current prices I think Bapcor is the best buy because of how low its PEG ratio is and also because it may expand into Asia which could boost growth for years to come.

Bapcor isn't the only one eyeing Asia, this top stock is growing strongly in Asia as well.

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Motley Fool contributor Tristan Harrison owns shares of Bapcor and Challenger Limited. The Motley Fool Australia owns shares of and has recommended Bapcor and Challenger Limited. The Motley Fool Australia owns shares of Class Limited and National Australia Bank Limited. 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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