I'm always on the hunt for ASX growth shares that look compelling for the long term. When share prices fall during a bear market, we can buy assets for a much cheaper price.
When valuations drop, I get excited about discovering oversold opportunities. I consider where businesses might be in terms of profitability in three to five years.
Ultimately, businesses that grow earnings over the longer term have the best chance of increasing their intrinsic value over time. Investors usually value companies based on their current and future profit potential.
With that in mind, the below stocks are ones I decided to buy.
Close The Loop Ltd (ASX: CLG)
Close The Loop collects and repurposes products through takeback programs across its resource recovery division, which also has a sustainable packaging division. Some of those products include electronic products, print consumables, cosmetics, plastics, paper and cartons. It's also involved in reusing toner and using post-consumer soft plastics as an asphalt additive.
I was already a shareholder in the business, but the sell-off made me want to take advantage of the appealing price to buy more.
The company's latest business update in June was very promising and further supported my thesis about the company. It said it's planning to explore IT refurbishment expansion opportunities in the US, EU, and the Middle East. It's also growing its HP relationship, where refurbishment opportunities have been identified with the 'HP Renew Solutions' initiative.
In that update, the company also said a new Mexico plant will be opened and running by October 2024. The European print consumables program has been expanded into Spain and Portugal, and HP has joined the program.
Finally, the company said it will construct a TonerPlas line after receiving $2.2 million in government funding.
According to Commsec, the ASX growth share is valued at around 6x FY25's estimated earnings at the current Close The Loop share price. I think that's really cheap for a growing business, as shown on the chart below, with the share price down 36% over the last year.
Australian Ethical Investment Ltd (ASX: AEF)
This company describes itself as Australia's leading ethical investment manager. It offers investors investment management products that align with their values and provide good long-term returns. Of course, I should add, that good returns for clients are not guaranteed.
There are three main things I look for when considering if a fund manager is a compelling investment.
First, does its investment style offer something different from the index benchmarks its funds compete against? Offering a range of investment funds with an ethical overlay can be appealing to investors seeking that. Of course, the long-term fund performance needs to be satisfactory to retain customers.
Second, is it seeing positive net inflows? If a fund manager is experiencing net inflows, then its funds under management (FUM) have an organic growth tailwind. Share markets have tended to go up over time, so the addition of net inflows means FUM can grow at a pleasing pace.
Australian Ethical has a superannuation offering. This helps the ASX growth share lock in the FUM it receives (due to the nature of when people can access their retirement savings), and it's experiencing solid net inflows every quarter. Remember, it's a mandatory requirement for employees to receive superannuation contributions if they are paid a salary. In the three months to June 2024, Australian Ethical experienced net inflows of $211 million.
Third, is the FUM growing? A fund manager's revenue and net profit are normally closely linked to the direction of the FUM movements. In FY24, Australian Ethical's FUM increased 13% to $10.4 billion.
Fund managers can deliver rising margins because their costs (such as wages and office occupancy expenses) don't need to rise at the same speed as FUM.
I think the ASX growth share's FUM and profit can steadily rise over the long term. It seemed attractive following a share price fall of 27% this year to date.
