2 ASX shares down 50% that I think have massive upside

I see great things ahead for these compelling stocks.

| More on:
A woman sits at her computer with her hand to her mouth and a contemplative smile on her face as she reads about the performance of Allkem shares on her computer

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • ASX shares that have fallen heavily can deliver much stronger returns if they are still growing revenue and profit
  • Australian Ethical has dropped 75% from its peak but is seeing good growth of FUM and underlying profit
  • Temple & Webster is utilising e-commerce adoption and AI to boost its scale and profit

ASX shares that have fallen hard could be opportunities because of their potential to bounce back and then keep rising.

If a company's share price drops from $10 to $5, it has fallen 50%. But if that price recovers to $10, then it has gone up by 100%.

Businesses that have gone down won't necessarily recover again. But, if we can find those companies that are growing their underlying operations and financial positions, that's when we could be onto winners. Let's look at my two ideas.

Australian Ethical Investment Ltd (ASX: AEF)

This is a fund manager that offers Aussie households investment funds that seek to align with their ethical views when it comes to which ASX shares they would want to have in their portfolio.

Since November 2021, the Australian Ethical share price has dropped by around 75%, which we can see on the chart below.

Created with Highcharts 11.4.3Australian Ethical Investment PriceZoom1M3M6MYTD1Y5Y10YALL1 Nov 202122 Jul 2023Zoom ▾Jan '22Apr '22Jul '22Oct '22Jan '23Apr '23Jul '23Jan '22Jan '22Jul '22Jul '22Jan '23Jan '23Jul '23Jul '23www.fool.com.au

The business seems to have a positive future, with there being a growing number of people looking for their investments to be appealing in terms of ESG (environmental, social and governance) factors.

In the ASX share's update for the year to 30 June 2023, its customer numbers had increased 50% over the 12 months to more than 127,000. A significant slice of that increase was thanks to the Christian Super members joining the fund.

Those new members boost the scale of the business. The company recently said it's expecting to report that the FY23 second-half revenue would be up 21% on the first half and that underlying net profit after tax (UPAT) would be 30% higher than the first half.

Management explained that "stronger revenue and disciplined cost management have contributed to the emergence of operating leverage and the underlying profit increase".

The ASX share also recently gave a funds under management (FUM) update that said FUM reached $9.2 billion at 30 June 2023. This was 10% higher than December 2022, and 48% higher than 30 June 2022.

Over the three months to 30 June 2023, it saw another $170 million of net inflows. It also benefited from "record super guarantee and super voluntary contribution amounts received in June".

I think that ongoing member growth and regular superannuation contributions will help the business continue to report good revenue growth, earnings growth, and operating leverage.

Temple & Webster Group Ltd (ASX: TPW)

The Temple & Webster share price has fallen more than 50% since October 2021.

Created with Highcharts 11.4.3Temple & Webster Group PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.com.au

This e-commerce ASX share has talked about a number of different ways it's using artificial intelligence (AI) to boost orders with customers and achieve better profit margins. This bodes well for the long term, in my opinion.

There may be some questions about how it's going to perform over the next 12 months with the uncertainty caused by inflation and higher interest rates.

However, the latest sales update from the company was promising. On 17 May 2023, it said trading in the last four weeks showed revenue growth of 10% year over year after completing cycling against COVID-impacted periods.

Once retail conditions return to normal, I believe the ASX share will benefit from an increasing amount of online shopping adoption by households. Temple & Webster could grow its number of customers in the long term, as well as grow the revenue per active customer.

This increasing scale should help the company achieve better profit margins, which could supercharge profit to grow even faster than revenue.

Foolish takeaway

I think both of these ASX shares have very promising futures, yet the share prices are more than 50% lower than their peaks. In five years, I think operating leverage could help both of them outperform the market.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Australian Ethical Investment and Temple & Webster Group. The Motley Fool Australia has recommended Australian Ethical Investment and Temple & Webster Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Opinions

Happy miner giving ok sign in front of a mine.
Opinions

Which ASX 200 stock offers 'material upside' amid continuing uncertainty over US tariffs?

Blackwattle Investment has identified one ASX 200 large-cap stock that is thriving on the uncertainty.

Read more »

A woman sits at her computer with her chin resting on her hand as she contemplates her next potential investment.
Financial Shares

2 rising ASX financial shares with 'meaningful upside' still left: fundie

Financials outperformed every other sector in FY25, but there are still buying opportunities left, say these experts.

Read more »

A businessman hugs his computer and smiles.
Opinions

If I could only own one ASX 200 share for the rest of my life, it'd be this one

This is one stock I expect to own forever.

Read more »

Man ponders a receipt as he looks at his laptop.
Technology Shares

Brokers rerate 3 leading ASX 200 tech stocks

Experts reveal their ratings on the ASX 200 tech sector's three biggest companies.

Read more »

Person holding a blue chip.
Opinions

Buy alert! 2 ASX 200 blue-chip shares worth a look now: expert

Dylan Evans from Catapult Wealth has identified two blue-chip shares that he thinks are good buys today.

Read more »

Two happy woman on a couch looking at a tablet.
Opinions

Why I'm excited to see the results of these ASX 200 shares

These stocks could reveal very interesting insights.

Read more »

Young male investor smiling looking at laptop as the share price of ASX ETF CRYP goes higher today
Opinions

Why I just bought this 5.2%-yielding ASX dividend stock and plan to buy even more

This business is one of my favourites for dividends and total returns.

Read more »

A young female investor with brown curly hair and wearing a yellow top and glasses sits at her desk using her calculator to work out how much her ASX dividend shares will pay this year
Opinions

Why I'm still investing in ASX shares during tariff uncertainty

There are a few reasons why I plan to continue investing even during uncertainty.

Read more »