Motley Fool Australia

Xero and 1 other ASX growth share to watch in August

wooden blocks with percentage signs being built into towers of increasing height
Image source: Getty Images

Could ASX growth shares outperform in 2020? I think some strong tailwinds make for an exciting earnings season ahead.

Why ASX growth shares could outperform this year

The dividends versus growth argument is as old as the share market itself.

However, I think 2020 has a compelling argument for ASX growth shares.

The preference for ASX dividend shares is often centered around the ‘bird in the hand’ argument. That basically suggests investors prefer a certain cash flow today compared to an uncertain, potential payoff in the future.

However, many companies have slashed dividends this year. That means 2020 could be the year that ASX growth shares outperform within the S&P/ASX 200 Index (ASX: XJO).

I’m excited about the upcoming August earnings season and I think there’s good reason why.

Why I like Xero and 1 more strong performer to watch in August

Shares in top ASX tech shares like Afterpay Ltd (ASX: APT) have been rocketing higher this year.

However, there have been a number of top ASX growth shares quietly outperforming the benchmark index.

The first company on my watchlist is Xero Limited (ASX: XRO). The Xero share price is up 14.7% and continuing to climb.

Xero provides an accounting software platform targeted at small and medium enterprises. 

That may not seem like a great business at the moment. However, Xero has some big customers locked in and that could help recurring revenue figures. 

I also think that added complexity in business accounting over the short to medium term could be a serious tailwind. Government stimulus programs are good for cash flow but also create some accounting headaches.

Add in the simplicity and low-cost Xero model and I think Xero’s FY20 earnings could receive a serious boost. Notably, Xero does not release its earnings alongside many of its ASX peers.

The Kiwi accounting group is set to announce its results in November at a similar time to the ASX banks. That means the Xero share price could have further to run compared to some of its ‘WAAAX’ tech peers.

It’s not just tech shares like Xero that I’ll be watching in August. Another New Zealand company that has caught my attention, and I’ll be keeping an eye on the A2 Milk Company Ltd (ASX: A2M) earnings result next month.

A2 Milk shares have rocketed 35.6% this year and are also part of the 2020 share price outperformers’ group.

Strong supermarket sales and steady international growth have underpinned the ASX growth share gains this year. 

I think the technical environment remains strong for the Kiwi dairy group. Farmgate milk prices remain low and the A2 Milk brand’s expansion into other product lines has proven to be a hit.

While a lot of future growth may already be priced in, I think A2 Milk’s earnings may be surprisingly strong next month.

That means the ASX growth share is worth watching to see if it can propel the Kiwi dairy company’s shares to a new record high.

Where to invest $1,000 right now

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes are the five best ASX stocks for investors to buy right now. These stocks are trading at dirt-cheap prices and Scott thinks they are great buys right now.

*Returns as of February 15th 2021

Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Xero. The Motley Fool Australia owns shares of A2 Milk and AFTERPAY T FPO. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

Related Articles…