I think there is little to gain by investing most of your money into the large caps of Australia of the ASX20.
In my opinion, the best way to generate pleasing returns is by focusing on shares that have little coverage by the media, analysts, fund managers or retail investors. Of course, some fund managers do hunt in the small cap and mid-cap space. In-fact, a business has just popped up in the top 20 holdings of high-performing WAM Research Limited (ASX: WAX).
One share that you definitely should consider for your portfolio is Bapcor Ltd (ASX: BAP). This business is the owner of auto business chains Burson and Autobarn.
Bapcor has long signalled that it expects its underlying profit to grow by at least 30% in FY18. Nearly any business would be happy with 30% profit growth. However, the key thing to like is that Bapcor is trading at 29.5x FY17’s earnings. This means that despite the strong share price growth since the start of April Bapcor has a PEG ratio of under 1.
It’s quite rare to find a quality growth business on the ASX with a PEG ratio of under 1.
Another thing to like about Bapcor is the organic growth it’s creating. Burson’s same store sales (SSS) growth is likely to come in at above 4% for FY18 whilst Autobarn’s SSS growth should be above 2%.
The business is also growing the number of stores too. Increasing SSS, more stores and higher profit margins all add to a growing bottom line for Bapcor. In the half-year result the earnings before interest, tax, depreciation and amortisation (EBITDA) margin increased from 11.3% to 11.4%. This means that each new revenue dollar earned is more profitable for the business.
Bapcor is also just starting to open locations in Asia. This could be a long-term growth runway for the business if it can create decent profit and economies of scale from its Asian operations.
You could arguably say that Bapcor is a recession-proof business because in a downturn people are likely to want to make their car last longer, not buy a new one. Therefore Bapcor could see an uptick in revenue if a recession were to occur.
Bapcor could be trading at around 23x FY18’s estimated earnings right now, which is a reasonable price if it can deliver another year of 20% or more profit growth in FY19. There are question marks over Bapcor’s long-term future with electric vehicles and automated vehicles becoming more prevalent, however Bapcor believes those issues are smaller and further away than the Bapcor pessimists believe.
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Motley Fool contributor Tristan Harrison owns shares of Bapcor and WAM Research Limited. The Motley Fool Australia owns shares of and has recommended Bapcor. 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.