The ASX 200 is full of quality shares, although there are few duds in there as well.
You don’t need to buy the whole index to create a portfolio of diverse businesses with exciting growth prospects.
If I were lucky enough to be suddenly given $10,000 to invest in four ASX 200 shares, these are the ones I’d choose:
REA Group Limited (ASX: REA) – $2,000
REA Group owns several leading Australian property sites including realestate.com.au and realcommercial.com.au.
The power of being number one is twofold for REA Group. It reinforces its position because it attracts the most potential buyers and then the most sellers – a pleasing loop. It also means that REA Group can increase prices regularly with little detrimental effect.
Over the longer-term I like that its earnings could benefit from the investments it has made into international property sites in South East Asia, India and the US.
It’s currently trading at 29x FY19’s estimated earnings.
Challenger Ltd (ASX: CGF) – $3,000
This business is the leader of the annuity industry in the country, providing a guaranteed source of income for retirees for their capital. Annuity sales should increase over time because the number of over-65s is projected to grow by 40% over the next 10 years and 70% over the next 20.
Mandatory super contributions and compounding should boost the size of those annuities over time. Challenger also benefits from supportive policies like means testing and that superannuation funds must offer guaranteed income as an option. It may also benefit if franking credits and negative gearing are crimped, making fixed interest products more attractive.
Rising interest rates are a medium-term worry, as it could hurt Challenger’s balance sheet.
It’s currently trading at under 15x FY19’s estimated earnings.
InvoCare Limited (ASX: IVC) – $2,000
InvoCare is Australia’s leading funeral business. In the long-term I think it has an attractive tailwind, 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.
It’s currently making network-wide upgrades to lighten and brighten its locations to make the funerals more of a celebration. Management are pleased with the upgraded results so far.
It’s currently trading at 23x FY19’s estimated earnings.
Costa Group Holdings Ltd (ASX: CGC) – $3,000
The country’s fresh food producer looks much better priced now that it has fallen around 25% over the past three months.
Costa is growing its profit and profitability thanks to investments, acquisitions, expansion plantings and growing into different food categories like avocados.
The price of food could increase over time with greater demand due to the Asian middle class, a growing population and healthier-in-general diets.
It’s currently trading at under 22x FY19’s estimated earnings.
I believe all four of these businesses have attractive long-term growth opportunities. At the current prices I think Challenger and Costa are even more attractive than the other two on valuation grounds, which is why I ‘allocated’ more money to them.
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Motley Fool contributor Tristan Harrison owns shares of Challenger Limited, COSTA GRP FPO, and InvoCare Limited. The Motley Fool Australia owns shares of and has recommended Challenger Limited and COSTA GRP FPO. The Motley Fool Australia has recommended InvoCare Limited and REA 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.