The best way to beat the market over the long-term is to invest in shares that are generating strong sustainable growth.
It doesn’t really matter what happens to the share price in one particular year if the profit grows each year. Time and compounding will allow the business to grow into its valuation over time.
Here are three shares that are generating impressive growth year after year:
Challenger Ltd (ASX: CGF)
Challenger is Australia’s leading annuity business which turns a retiree’s capital in a guaranteed source of income.
The business has been growing impressively since the GFC thanks to rapid growth of annuity sales. At the March 2018 quarter the life book had grown by 74% compared to the prior year.
Challenger is expecting underlying profit growth of 8% to 12% in FY18 and it could keep growing with the government’s recent change in the budget requiring superannuation trustees to offer income products for life. Challenger is the leader in this space.
It’s currently trading at 16x FY19’s estimated earnings.
Citadel Group Ltd (ASX: CGL)
Citadel is a software business that offers long-term contracts to various government bodies like health, defence and education . It calls itself a specialist in secure enterprise information management.
It has expanded into the private sector as well as providing services to state and local governments.
Software is an integral part of providing any service and Citadel is now across a range of applications. With high profit margins and good organic growth it has good potential for continued growth and whilst having a defensive profile.
It is currently trading at 22x FY19’s estimated earnings.
Costa Group Holdings Ltd (ASX: CGC)
Costa is one of Australia’s largest fresh food producers. When you visit your supermarket I’m sure you will see at least one of Costa’s segments of mushrooms, berries, tomatoes, citrus fruit and avocadoes being sold on the shelves.
One of the key strengths to Costa is how it can offer almost year-round produce to its customers. Costa has strategically added farms in different states so that it can grow food in different seasons.
There is a growing demand for quality Australian produce both from Aussies and abroad. The same Asian demand boom which has helped infant formula companies could help Costa, which could lead to rising food prices and growing profit.
If Costa can increase its underlying profit by more than 20% a year for the next few years then it could be a very good market-beater with little correlation to the economy.
It’s predicting underlying profit growth of 25% this year and Costa is currently trading at 25x FY19’s estimated earnings.
It’s a coincidence that all three businesses’ tickers start with CG, but they are all good growth options. At the current prices I think Citadel and Costa look like good long-term value. Challenger is attractive too, but rising interest rates could hurt the value of its investments.