If there is one investing lesson I would leave to my children it would be this:
Compound. Compound. Compound.
I am a huge believer in compounding. And the secret to compounding is momentum; the force something has when it is moving. Companies with momentum of revenue growth and free cashflow can grow their competitive advantage and win even more customers.
As we head into 2020 I've been reviewing my portfolio and there are 3 companies that I am backing to continue their strong recent momentum.
1. Xero Limited (ASX: XRO)
Accounting platform Xero has continued to post huge numbers in 2019. In the 12 months to September, subscribers grew by 30% to pass the 2 million mark while operating revenue in the first half of the 2020 financial year grew by 32%.
Xero's strong operating cash flow is now a lever to both enable reinvestment in the core platform and support marketing to win new customers. I think that bodes well for another year of solid growth in 2020.
That said, with the Xero share price up almost 90% so far in 2019, I am cautious that there is very little room for error if the company's main regions (NZ, Australia and the UK) experienced a recession or the momentum unexpectedly slows.
2. Pushpay Holdings Ltd (ASX: PPH)
The Pushpay share price has had relatively soft year in 2019, up just 8.25%. However, I think the company is well positioned to keep building on its strong base of customers.
Revenue grew 30% in the 6 months to September 2019 with a solid increase in processing volumes. But most importantly, gross margins grew and operating cash flow turned positive which enables the company to start funding organic growth in the year ahead.
3. A2 Milk Company Ltd (ASX: A2M)
After joining the herd at the a2 Milk AGM last week, I am optimistic that a2 Milk can continue growth and strong cashflows in 2020. The $10 billion company announced it expects continued strong revenue growth and upgraded guidance of full year EBITDA margin to 29–30%, from its initial expectations of 28%.
Foolish takeaway
If these 3 companies can capitalise on their momentum in 2020 (and beyond) they could compound their value significantly in the years to come. Of the 3 companies I think shares in Pushpay and a2 Milk look most compelling today. Still I'm being cautious. With expectations of all 3 companies high, there is certainly risk of big share price falls if the growth fails to materialise.
