The local share market is full of small to mid-cap companies that may or may not offer investors growth potential. For example, a business like oOh!Media Ltd (ASX: OML) has gained around 150% for investors over the past five years. Its digital advertising model may also mean it can deliver reasonably consistent growth to investors over the long term.
However, last Friday we saw with the 42% share price fall of Adacel Technologies Limited (ASX: ADA) in a single day, how small cap tech shares can plunge violently. In fact, Adacel’s share price is now down 65% over just the course of 2018.
As such as an investor it tends to pay to focus on established market leaders that have proven long-term track records, alongside the scale and re-investment power to stay ahead of the competition.
The ASX’s three leading internet-focused online classifieds companies also have network effects where they’re so dominant in attracting the most buyers and sellers for their products it’s hard for competitors to break their market hold.
For example, if you want to buy or sell a car you’re going to visit the website that has the most cars for sale,.
Carsales.com Ltd (ASX: CAR) is a leading internet stock that benefits from this network effect as if you want to try to get the best price for your used car in Australia you have no choice but to pay for an advert on the site that has the most buyers. Carsales shares fell quite heavily with the market over September and October, which gives investors the opportunity to pick up shares at a discount to recent times. For long-term investors Carsales is also building equivalent businesses in the large South Korean and Brazilian markets. There’s a lot to like about this stock.
SEEK Limited (ASX: SEK) is the jobs board business that has grown its share price around 42% over the past five years with its annual dividend also up around 150% over the period. SEEK is facing competition from LinkedIn, but it operates mainly in the white-collar space, whereas SEEK is also focused on the blue-collar trades and hospitality space for example.
SEEK is also the majority owner of rapidly growing Chinese jobs website Zhaopin.com. One day it could be far bigger than SEEK Australia. The SEEK group still has a lot of potential and founder-led management team.
REA Group Limited (ASX: REA) as the operator of realestate.com.au has been the best performing internet classifieds stock over the past 5 years in being up 86% plus dividends. It probably has the strongest competitive position of all with less competition from the likes of Facebook (Carsales) or LinkedIn and has the track record to prove it.
Even when homes are taking longer to sell in today’s weakening market, REA Group can profit by selling more products like ‘depth listings’ that lift a property’s prominence on the website. It looks a true all-weather growth stock and may be the pick of the three today.
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Motley Fool contributor Yulia Mosaleva has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Adacel Technologies Limited. The Motley Fool Australia has recommended carsales.com Limited, oOh!Media Ltd, REA Group Limited, and SEEK 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.