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2 out-of-favour shares with explosive growth potential

As they say, ‘one man’s trash is another man’s treasure’, and never is that more true than in the share market.

For every person selling XERO FPO NZ (ASX: XRO) at $14.18 per share, there’s another screaming out “BARGAIN!!” and probably another 10 or 15 waiting on the sidelines for the price to either fall further or recover.

Decisively taking advantage of declines in the value of a company (assuming your investing thesis hasn’t changed) is a very effective way to top up your shareholding and maximise your potential for future profits.

With Xero having fallen 42.5% in the past 52 weeks, investors are being handed a golden ticket to a growth factory.

Given that the company grew subscription revenue by 85% (!) in the six months to September 30 and booked an impressive corresponding increase in cash on hand (up to $170 million), the stage is set for performance that could catapult Xero into superstardom.

Xero is now the software of choice for over 20% of small businesses in New Zealand, and management reported growth in the number of paying customers of 100% or greater in Australia, the UK and the US in the last six months.

While New Zealand’s growth will begin to slow as that market becomes saturated, existing customer numbers in Australia (158,000), the United Kingdom (61,000), the USA (22,000) and the rest of the world (11,000), are just a drop in the bucket of the potential customers available.

Management concludes the latest announcement with the words ‘Xero expects strong growth to continue for the foreseeable future’, and I admit I have to agree.

Another great company trading at bargain prices is Ainsworth Game Technology Ltd (ASX: AGI), which is down 35.1% in the past 52 weeks despite growing revenue by 26% and profit by 51% in that time.

Like Xero, Ainsworth has just dipped its toe in foreign markets with initial forays into South America looking very promising, while licensing hurdles delay (but ultimately shouldn’t affect) the growth potential of the USA.

Domestically, Ainsworth also goes from strength to strength, reporting revenue growth of 380% in Victoria over the past twelve months to September 30.

There is significant uncertainty in the company regarding the succession plans of Len Ainsworth, whose large shareholding has the potential to disrupt prices if it were to come on the market.

Be that as it may, the company looks like a real bargain at today’s prices and I think could prove a winner for the long term as well.

Exciting developments in the fledgling ASX tech sector…

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Motley Fool contributor Sean O'Neill owns shares in Xero. The Motely Fool owns shares in Xero.

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