My 10 best mid-cap share picks revisited

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Almost three years ago I wrote an article featuring my favourite mid cap companies and since then I have been tracking an equally weighted portfolio of these 10 stocks.

In that time the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has risen 8.8%, whilst an equally weighted portfolio of my 10 picks would have delivered capital gains of 91.6%! Both figures are before dividends.

Although three years is not that long, this suggests that buying high quality businesses and holding for the long-term delivers excellent returns. The trouble is that sitting and doing nothing is hard to do.

Flight Centre Travel Group Ltd (ASX: FLT) – capital return: 43.2%, dividend return: 10.5%

Travel retailer Flight Centre continues to grow revenue in the face of stiff online competition although operating margins and return on capital have fallen in recent years. This could be partly down to a weaker Aussie dollar and so may reverse in future years.

REA Group Limited (ASX: REA) – capital return: 131.5%, dividend return: 6.9%

Online property portal REA Group is a truly exceptional business enjoying huge pricing power, low capital needs, network effects and a dominant market share. Future returns could moderate given the company’s increasing maturity in Australia but planned overseas expansion provides growth potential.

Servcorp Limited (ASX: SRV) – capital return: -28.5%, dividend return: 12.4%

Serviced office provider Servcorp’s business has proven less resilient than I originally thought. The company has short-term contracts with customers so revenue can fall away quickly when economic conditions deteriorate, whilst it is left carrying high fixed costs. The US division is still yet to reach profitability despite years of investment.

Navitas Limited (ASX: NVT) – capital return: -2.2%, dividend return: 13%

Education provider Navitas is another poor performer although the stock generated a modest positive return after dividends. Revenue growth in its main University Pathways division which provides services to international students has stalled due to a couple of college closures but long-term sector tailwinds remain.

CSL Limited (ASX: CSL) – capital return: 113.8%, dividend return: 6%

Blood products manufacturer CSL is one of the highest quality stocks on the ASX. The company enjoys numerous competitive advantages including unmatched R&D capabilities, the broadest product range in its industry and cost leading plasma collection and product manufacturing facilities.

Altium Limited (ASX: ALU) – capital return: 402%, dividend return: 14.1%

Printed circuit board software developer Altium has been the standout performer in the portfolio. It is one of the few stocks that have successfully transitioned from micro cap status to a global leader. Altium has sticky customer due to the costs of switching software and operates in a growing global market.

Sydney Airport Holdings Ltd (ASX: SYD) – capital return: 35.5%, dividend return: 17.2%

Sydney is and will remain a world class travel destination and so Sydney Airport will continue to benefit from the secular growth in global tourism. The airport also enjoys high pricing power as it is currently the only international airport in the city.

AUB Group Limited (ASX: AUB) – capital return: 55.7%, dividend return: 13.5%

Most roll-ups come undone but insurance broker AUB Group has executed a successful growth by acquisition strategy over the years. A major strength of its approach is its co-ownership model where acquirees retain an equity stake in their businesses.

Breville Group Ltd (ASX: BRG) – capital return: 68.6%, dividend return: 13.2%

Breville makes innovative kitchen appliances and is a globally respected brand. It regularly receives awards for its products and generates 75% of profits from outside Australia. Management are aiming to accelerate growth in coming years through more rapid product development, geographic expansion and acquisitions.

Nick Scali Limited (ASX: NCK) – capital return: 97.7%, dividend return: 24.6%

Nick Scali has cultivated a desirable brand and has benefited from the housing boom which has coincided with the roll-out of its store network. As a retailer it has high operating leverage and so profit has outstripped revenue growth in recent years. However, this works both ways and there are signs that the housing market is now moving into reverse.

 

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