2 ASX growth stocks that are almost recession-proof

The share price of Pro Medicus Limited (ASX: PME) and Xero Limited (ASX: XRO) survived the pandemic and then thrived. How did these two ASX stocks prosper in these difficult times?

Customer loyalty and a stronghold track record played key roles for both of these companies.

Pro Medicus share price

Source: Rask Media PME share price chart over 2 years

Pro Medicus develops and delivers medical imaging software and services to hospitals, diagnostic imaging groups and other health related entities.

Customer contracts are usually multi-year contracts and once the software is installed it becomes an extremely sticky product.

Before the pandemic, Pro Medicus had already secured many of the largest hospitals in the United States. While it’s important to have a financially strong customer base, I think it’s even more important to have a critical product.

Pro Medicus proceeds are important regardless of the state of the economy as hospitals continue need use the software to perform its functions.

Its strong, debt-free balance sheet, backed by $ 38 million in cash in December 2019, has helped the company weather the headwinds in the economy.

Xero share price

Source: Rask Media XRO share price chart over 2 years

Xero is the leading provider of business and accounting software in Australia and New Zealand and is growing rapidly in the UK and US.

This company is another that offers a mission essential product. Will businesses still need to use accounting software during a recession?

It’s a resounding yes from me!

I think changing management / accounting software would fall to the bottom of the business priority list in times of economic crisis.

Churn rates increased slightly in the first few months of this year, before dropping below pre-COVID 19 levels, illustrating the rigidity and value of Xero’s products.

Although Xero’s balance sheet is made up of debt, it is strongly supported by large free movement of capital as shown below.

Source: Investor presentation XRO FY21

In addition, Xero’s current assets far exceed its current liabilities.

As you can see, the combination of a loyal clientele and a great balance sheet is essential to withstand adverse economic events.

This is what I am looking for as part of the Rask investment philosophy.

If you’re looking for ASX small cap stocks that could become the next Pro Medicus or Xero, check out the Rask Rockets Beyond program. Hurry, the mission opens to new members this Thursday evening!

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