My favourite method for outperforming the market is to pinpoint ASX shares with strong profit growth potential that the market undervalues.
The ASX's good technology businesses are capable of producing good profit growth, but they're also valued with higher forward price/earnings (P/E) ratios than other sectors.
There are companies in other sectors that are just as capable of producing pleasing profits, but these businesses aren't valued as highly.
Recently, I've invested in these two stocks because I'm optimistic about their earnings growth outlook.
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Collins Foods Ltd (ASX: CKF)
Collins Foods is a franchisee operator of a large number of KFC restaurants in Australia and Europe.
I think KFC is a strong brand that can deliver long-term success in Collins Foods' operational markets.
Collins Foods is growing by expanding its store networks and achieving same-store sales (SSS) growth.
In the FY24 first-half result, KFC Australia reported SSS growth of 6.6%, and KFC Europe saw SSS growth of 8.8%. If SSS growth continues to be healthy, this can help drive the business' margins higher.
The HY24 result saw revenue rise 14.3%, underlying earnings before interest, tax, depreciation and amortisation (EBITDA) grow 16.7%, and underlying net profit after tax (NPAT) jump 28.7%. That's a good growth rate for the ASX share and demonstrated operating leverage.
The estimates on Commsec suggest Collins Foods' earnings per share (EPS) could rise 44% between FY24 and FY26. The forecast would put the current Collins Foods share price at under 13x FY26's estimated earnings – that looks very cheap to me for a growing business.
Close The Loop Ltd (ASX: CLG)
Close The Loop's core offering is to collect and repurpose products with takeback programs in the US, Australia, South Africa and Europe. The ASX share's overall premise is for there to be "zero waste to landfill" with the products it deals with.
The company recovers a wide range of electronic products, print consumables, cosmetics, plastics, paper, and cartons. It also uses toner and post-consumer soft plastics as asphalt additives.
According to the company, another service that it provides is sustainable packaging products with its packaging division, which enables "greater recoverability and recyclability".
The ASX share recently announced it was exploring IT refurbishment expansion opportunities in the US, EU and Middle East. Its print consumable takeback program has been expanded into Spain and Portugal, with HP joining the program. The company revealed a new IT refurbishment plant in Mexico will be operational by October 2024. It's also constructing a second TonerPlas line after the awarding of $2.2 million in government funding.
The company's FY24 first-half result saw revenue increase by 76% year over year to $103 million, the gross profit margin increase from 32.8% to 36.2%, EBITDA grow by 139% to $22.7 million, and underlying NPAT jump by 164%.
According to Commsec, the Close The Loop share price is valued at just 7x FY24's estimated earnings and EPS is predicted to grow by 23% between FY24 and FY26.
