There have been a number of amazing performances on the ASX over the past few years. a2 Milk Company Ltd (ASX: A2M) has been amazing with share price growth of around 480% over the past two years. The next two years isn’t going to be as good, but a2 could still be a good one to own compared to an ASX index product. But, what will the next a2 be? I don’t think it’s going to be its competitor Bellamy’s Australia Ltd (ASX: BAL) because it too has already made significant gains. There are three main things to…
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There have been a number of amazing performances on the ASX over the past few years. a2 Milk Company Ltd (ASX: A2M) has been amazing with share price growth of around 480% over the past two years.
The next two years isn’t going to be as good, but a2 could still be a good one to own compared to an ASX index product.
But, what will the next a2 be?
I don’t think it’s going to be its competitor Bellamy’s Australia Ltd (ASX: BAL) because it too has already made significant gains.
There are three main things to consider:
A key part of a business’ potential growth is how big its potential addressable market is. Bellamy’s and a2 have performed so well because although Australia’s population is small there is a huge amount more of Asian parents wanting to provide safe nutrition for their children.
A business that is able to tap into the huge Asian middle class or the rise in usage of technology could be ones to watch. For example, Costa Group Holdings Ltd (ASX: CGC) and Appen Ltd (ASX: APX) are already benefiting from those respective trends and could continue to do well.
Perhaps Freedom Foods Group Ltd (ASX: FNP) will be the next one to grow from Asian demand.
How will that business win the market?
If a business is going to revolutionise an industry it usually needs to be the best, the cheapest or offer something entirely different.
Think of Xero Limited (ASX: XRO), it is widely viewed as the best accounting software for small businesses and offers a large selection of tools to make the job easier. It was completely different to what already was in the market.
A2 products are supposedly easier to digest for consumers, making it seem higher quality. Bellamy’s is organic, which also is often seen as higher quality.
Various other businesses are capturing market share by offering the best service – like Google with Search, Maps and YouTube.
The key here is to find a smaller business that has a great offering that has a lot of room to grow in size. Altium Limited (ASX: ALU) supposedly has the best and the cheapest electronic PCB software in the industry.
Is it capable of increasing profit margins?
A business that will truly deliver great profit growth and therefore returns is one that is able to increase its profit margins as it grows. This will result in the profit growing faster than revenue over time.
A2 and Altium are doing this wonderfully as each report comes in. Businesses like Woolworths Group Ltd (ASX: WOW) are seeing their margins being slowly eroded.
For the real market-beating opportunities I think you need to find shares that are expanding overseas. That gives the business the best chance for fulfilling its addressable market and increasing its economies of scale.
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Motley Fool contributor Tristan Harrison owns shares of COSTA GRP FPO. The Motley Fool Australia owns shares of and has recommended COSTA GRP FPO. The Motley Fool Australia owns shares of A2 Milk, Appen Ltd, and Xero. The Motley Fool Australia has recommended Freedom Foods Group 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.