2 ASX shares I think could double in 3 years

I'm predicting good returns from these two ASX stocks.

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Key points

  • The current investment market has opened up compelling value
  • Adairs now seems at a very cheap value compared to COVID times, and it has growth plans for the next few years
  • Close The Loop is involved in recycling and the circular economy, and it’s valued at only 11 times FY24’s estimated earnings

I believe that the two ASX shares I'm going to write about in this article have the potential to deliver total returns of over 100% in the next three years.

While small businesses naturally have more room to grow compared to large businesses, I think the two companies I'm going to write about are underrated at the current valuations. In three years' time, I think they will be higher.

Adairs Ltd (ASX: ADH)

The Adairs share price has dropped 52% since 1 February 2023 and 70% from June 2021. The sales environment isn't as strong as before – sales in the second half of FY23 to week 48 were down by 7%.

The next 12 months could be a bit tricky for the ASX retail share after all of the interest rates rises. But, I think there is strong rebound potential following this upcoming uncertain period.

For starters, Adairs said its gross profit margin was "in line with plan" and is expected to be ahead of the FY22 second half. I think this bodes well for the company's profitability. It also said that inventory has been "well managed" and will "finish below December 2022 levels."

The ASX share is now priced below the lowest levels seen in 2022 and almost as low as April 2020, as we can see on the chart below.

In two or three years, I believe the business will have regained investor confidence and the outlook won't seem so gloomy. During this period, I think it can grow with a national rollout of Focus on Furniture stores, as well as upsizing some Adairs stores – bigger stores are reportedly much more profitable.

Looking at FY19, which included a period of house price declines, the company made earnings per share (EPS) of 17.9 cents. The current Adairs share price is valued at less than 8 times FY19's earnings. It paid an annual dividend per share of 14.5 cents in FY19, which represents a grossed-up dividend yield of 14.8%. I think these numbers are a decent benchmark.

Close The Loop Inc (ASX: CLG)

Not many investors may have heard of this ASX share. It's a global business in Australia, Europe and the US.

It's involved in a number of areas of the 'circular economy'. The company says it "creates innovative products and packaging that includes recyclable and made-from recycled content, as well as collect, sort, reclaim and reuse resources that would otherwise go to landfill. From recovering a wide range of electronic products, print consumables, eyewear and cosmetics, through to the reusing of toner and post-consumer soft plastics for an asphalt additive, the company is focused on the future, sustainability and the circular economy."

This ASX share is exposed to a string tailwind of increased levels of recycling. The company can make bolt-on acquisitions to boost its global scale over time. It's already predicting good growth in FY24.

Close The Loop is expecting to make earnings before interest, tax, depreciation and amortisation (EBITDA) of $22 million in FY23. It's guiding that FY24 EBITDA will be "at least" $43 million, which doesn't account for previously identified synergies from its acquisitions, nor the "expansion of contracts and product lines".

Joe Foster, the ASX share's CEO, said:

We believe our forecasts demonstrate the strength of the business in what continues to be a growing sector in which we will continue to benefit from tailwinds. We also expect to gain further confidence in the ISP TEK business as we become more familiar with its performance and remain committed to providing updates in the future.

With the acquisitions of ISP TEK and In-Plas in the US, we are now well positioned to be the leading circular economy company in the world that is delivering the only end-to-end solution.

According to Commsec, the company is valued at just 11 times FY24's estimated earnings, which seems cheap to me.

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. The Motley Fool Australia has positions in and has recommended Adairs. 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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