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Buy these 3 shares for strong diversification

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

I believe that diversification is important to achieve satisfactory returns in the short-term and the long-term.

Diversification doesn’t just mean spreading your money among Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group (ASX: ANZ) and Telstra Corporation Ltd (ASX: TLS).

I think it’s important that investors spread their money across different industries and different businesses that have good growth prospects.

I am particularly interested in buying shares of companies that are currently going through a bit of a rough patch. After all, to ‘buy low’ you have to buy the shares when they’re down.

Here are three I think fit the bill:

Greencross Limited (ASX: GXL)

Greencross shares have recently been heavily sold down about 20% due to the company making a number of impairments and provisions for FY18.

There was a feeling of the new CEO clearing the decks and starting anew, which means that FY19 is likely to show better growth with the lower FY18 result.

The pet industry has a good outlook with a growing number of pets and more spending per pet due to additional services like pet insurance and grooming. Greencross is likely to benefit as it grows its number of Petbarns and Greencross vets across Australia.

It’s currently trading at 11x FY19’s estimated earnings with a handy grossed-up dividend yield of 6.6%.

InvoCare Limited (ASX: IVC)

InvoCare shares have also been sold down because investors are worrying funeral prices could come under pressure due to competition.

However, InvoCare management are still predicting that it can generate 10% operating earnings per share (EPS) growth after it has finished upgrading many of its locations.

Death volumes are expected to grow by 1.4% per annum between 2016 to 2025 and then increase by 2.2% per annum from 2025 to 2050. I believe this will be a very helpful slow burner for InvoCare’s growth.

InvoCare is trading at 21x FY19’s estimated earnings with a grossed-up dividend yield of 5.33%.

Collins Foods Ltd (ASX: CKF)

Collins Foods is a large scale fast food franchisee that runs a lot of KFCs around Australia. Growth was slowing due to not having as many acquisition targets. The bigger it becomes the smaller impact purchasing a few franchisees would make on the whole business.

However, I am encouraged by the fact the company has recently moved into Europe and is now planning on building its presence there. Obviously, Europe has a much bigger population than Australia, which gives the company a lot more room to grow.

It has also started opening Taco Bells in Australia. This isn’t the first time the taco chain has tried to get into Australia, but perhaps Collins can create another successful national chain of stores.

Collins is currently trading at 19x FY17’s earnings with a grossed-up dividend yield of 4.4%.

Foolish takeaway

All three shares are trading at better value than they were a few months ago. I’d be happy to pick up some more Greencross and InvoCare shares due to how low the price/earnings ratio has dropped, whilst Collins Foods is a good slow-and-steady grower.

Other top shares that could be used to diversify your portfolio are these exciting stocks.

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Motley Fool contributor Tristan Harrison owns shares of Greencross Limited and InvoCare Limited. The Motley Fool Australia owns shares of and has recommended Greencross 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 Scott Phillips.

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