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.
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.
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.
