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It might be counterintuitive, but sometimes investors might be best served to ignore an earnings downgrade.
That’s because if the business is still in a position to take off in the long run, a one-off downgrade may not matter that much.
In fact, it might even present a juicy buying opportunity as skittish shareholders sell off their holdings and bring the price down.
Fortunately for us, Red Leaf Securities chief executive John Athanasiou reckons he’s found an ASX share that’s just in that situation.
‘A dominant position in an industry with high barriers to entry’
The share price for Cleanaway Waste Management Ltd (ASX: CWY) has dropped almost 17% since 21 April.
The movement down wasn’t helped by an update to the market in May.
“The company downgraded earnings due to floods and higher fuel and labor costs,” Athanasiou told The Bull.
But this is a temporary hiccup, and the analyst feels like the structural advantages for Cleanaway are still in play.
“The waste management company has a dominant position in an industry with high barriers to entry,” said Athanasiou.
“The bulk of the company’s revenues are generated from recurring multi-year contracts.”
Athanasiou would buy the stock now for holding over an extended period.
“Despite lag in cost recoveries, Cleanaway’s longer term outlook is bright.”
Cleanaway is scheduled to report its preliminary numbers on 19 August.
Recurring revenues with pricing power to fight inflation
Back in June, Wilsons head of investment strategy David Cassidy also spruiked Cleanaway’s long-term potential, calling it a “quality” ASX share with inflation protection.
“The majority of Cleanaway’s revenue is contracted and therefore recurring,” he said at the time.
“Multi-year contracts provide steady volumes and recurring revenues and include appropriate price adjustment mechanisms.”
The wider analyst community is somewhat divided over the waste management provider.
According to CMC Markets, seven out of 14 analysts currently recommend Cleanaway shares as a buy, with five ratings it as a hold.