2 ASX stocks that could explode in February

I think these stocks could surprise this month.

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ASX reporting season is a very interesting time. I'm going to talk about two ASX stocks that could be undervalued going into February and may impress the market.

We've only seen a few results so far this month, but I thought the Nick Scali Limited (ASX: NCK) report was very interesting. It was so good that the Nick Scali share price jumped 16% in response.

Nick Scali revealed that its gross profit margin increased by 360 basis points to 65.6%. Recent trading showed January 2024 written sales orders of $58.9 million were up 3.6% compared to January 2023. The retailer said the "positive momentum" of the second quarter of HY24 is continuing.

With that result in mind, I think these two businesses could also impress.

Adairs Ltd (ASX: ADH)

Adairs is one of the most similar businesses to Nick Scali on the ASX. Adairs operates Adairs, Focus on Furniture and Mocka.

If the strength of household spending is widespread, rather than just limited to Nick Scali, then Adairs' trading update could impress.

Investors really aren't expecting much of the business, the Adairs share price is down over 30% in the last year and it has fallen 65% from April 2021.

It's understandable why the ASX stock has fallen so much – in an elevated cost-of-living world, some households may reduce their spending on home furnishings and furniture. But, the market may have gone too pessimistic.

The company is now only valued at 10.6 times FY24's estimated earnings and 8 times FY25's estimated earnings. A rise of 10% would still mean the Adairs share price has a very low price/earnings (P/E) ratio.

Wesfarmers Ltd (ASX: WES)

Wesfarmers is a diversified business with a number of different sectors, including chemicals, energy, fertilisers, retail and healthcare.

The company has already told investors that its main businesses of Kmart and Bunnings have been doing well, with households looking to find the best value on offer.

I think Kmart's earnings could impress the market. At the ASX stock's AGM, it said that "strong financial results have continued" at Kmart Group as it benefited from "market-leading value credentials of its Anko products, which are resonating with an increasingly wide cross-section of households."

I'm also hopeful that the better-than-expected performance of Nick Scali could imply that house-related spending is still strong, which could suggest Bunnings may be performing well.

Bunnings is by far the biggest profit generator in the Wesfarmers stable, so seeing good profitable performance here could make the biggest difference for investors and could help support the Wesfarmers share price in the shorter-term but most importantly the long-term.

According to Commsec, the Wesfarmers share price is valued at 27 times FY24's estimated earnings.

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 Adairs and Wesfarmers. The Motley Fool Australia has positions in and has recommended Adairs and Wesfarmers. The Motley Fool Australia has recommended Nick Scali. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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