It’s quite hard to get the balance between risk, income and growth. Australia’s large caps like Wesfarmers Ltd (ASX: WES) and BHP Billiton Limited (ASX: BHP) have been around for a very long time, but they don’t offer much growth. It’s hard to grow quickly when they are already some of the biggest companies in Australia. Small caps do offer much better potential for growth. It’s much easier to grow a small business at a good rate compared to a large business. However, small businesses can be much more volatile and are perhaps more likely to go bust….
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It’s quite hard to get the balance between risk, income and growth. Australia’s large caps like Wesfarmers Ltd (ASX: WES) and BHP Billiton Limited (ASX: BHP) have been around for a very long time, but they don’t offer much growth. It’s hard to grow quickly when they are already some of the biggest companies in Australia.
Small caps do offer much better potential for growth. It’s much easier to grow a small business at a good rate compared to a large business. However, small businesses can be much more volatile and are perhaps more likely to go bust.
A perfect mix between the two could be mid-caps. They are large enough to be able to withstand any economic shocks, small enough to be able to deliver market-beating growth and profitable enough to pay out dividends.
Here’s how I would invest $5,000 at the current prices:
InvoCare Limited (ASX: IVC) – $1,500
InvoCare is Australia and New Zealand’s leading funeral operator with a market cap of $1.51 billion according to the ASX.
It has come under pressure in recent months after announcing it was spending a considerable amount of money on re-vamping many of its locations. Not only will this cost a lot but it will also reduce sales as the locations will be closed for a period of time.
The share price may fall after the August report, particularly with the amount of short interest, but in the long run I expect that the profit, margins and share price of InvoCare will increase because 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. This is a long, helpful tailwind.
It’s currently trading at 23x FY19’s estimated earnings.
Costa Group Holdings Ltd (ASX: CGC) – $1,500
Costa is one of my favourite growth companies because it plays into several different themes. The fresh food producer currently has a market cap of $2.47 billion according to the ASX.
Costa is doing a good job by growing geographically as it expands in Australia, Asia and North Africa. It plays into the growing national and global populations. It plays into the Asian middle class wanting quality Australian-produced items.
All of these factors should lead to rising food prices for Costa. If it can continue to grow underlying profit by double digits for the foreseeable future then it could be good value trading at only 25x FY19’s estimated earnings.
Japara Healthcare Ltd (ASX: JHC) – $1,000
Japara is one of Australia’s largest aged care providers. I’m sure most readers are aware of the ageing tailwind theme.
The market has not been kind to Japara over the past few years, the whole aged care industry has suffered due to several setbacks. However, Japara could be about to recover as the government starts increasing funding per person again.
Plus, Japara is projected to add more than 1,000 new beds over the next couple of years, which should add a lot more revenue and reduce costs meaning profit could jump between now and FY21.
Japara is currently trading at 24x FY19’s estimated earnings.
Greencross Limited (ASX: GXL) – $1,000
Greencross is Australia’s largest pet company. Despite all the negativity about the pet sector recently, it is growing at a steady pace.
The number of pets has increased substantially over the past five thanks to a rising human population and because we have more pets per person.
Greencross is a good way to profit from this trend because it offers all the essential services that a pet needs like a pet supermarket (Petbarn) and a pet hospital (Greencross).
The strategy of co-locating a vet inside a Petbarn reduces costs and hopefully leads to increased revenue due to cross-selling.
Greencross is currently trading at 12x FY19’s estimated earnings.
I’m fairly confident that the above four mid-caps will deliver a good average total return over the next five years. All four businesses are expected to deliver top line growth and increase their profit margins. If I could only pick two it would be InvoCare and Costa, which is why I allocated more money to them.
The best mid cap share of all to choose could be this growth share which is predicting profit growth of 30% in this year alone.
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Motley Fool contributor Tristan Harrison owns shares of COSTA GRP FPO, Greencross Limited, InvoCare Limited, and JAPARA DEF SET. The Motley Fool Australia owns shares of and has recommended COSTA GRP FPO, Greencross Limited, and Wesfarmers Limited. The Motley Fool Australia has recommended InvoCare 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.