During turbulent times like now, it is imperative to properly balance risk and return when investing in ASX shares.
That's according to Wilsons head of investment strategy David Cassidy, who said share markets are under threat.
"The risk of recession has increased over the past month," he said in a Wilsons memo.
"We think that risks are likely to stay elevated as the market becomes more concerned about the growth outlook as the US Fed and RBA hike rates at a lightning pace over the next 3 months."
To combat this uncertainty, Wilsons analysts have adjusted their "focus list" of desirable ASX shares.
But don't get too conservative, is the advice from Cassidy.
"We implore investors not to get too bearish as we believe global inflation — led by the US — and recession risks should fade over the next 6 months."
He then named three ASX shares that his team has added, with one specifically a standout:
'Quality can outperform over the long run'
Wilsons analysts believe there are some quality companies selling for excellent value after the recent market sell-off.
"We believe quality can outperform over the long run and should generate even better relative returns if bought at a reasonable price," said Cassidy.
"We screened the S&P/ASX 300 (INDEXASX: XKO) and found a dozen names of quality stocks that look 'value'."
Subsequently, his team has added its weighting to CSL Limited (ASX: CSL) and Telstra Corporation Ltd (ASX: TLS).
CSL shares have lost 8.6% since the start of the year, and still have not returned to their pre-COVID high.
Similarly the Telstra share price has dipped 8.9% year-to-date, although it is 7.4% higher over the past 12 months.
But the overwhelming winner in the hunt for "quality defensives", as Cassidy calls them, is Cleanaway Waste Management Ltd (ASX: CWY).
Recurring revenue from long-term and inflation-protected contracts
Cassidy described the waste management provider as displaying "quality earnings growth with defensive characteristics".
"The majority of Cleanaway's revenue is contracted and therefore recurring," he said.
"Multi-year contracts provide steady volumes and recurring revenues and include appropriate price adjustment mechanisms."
To demonstrate, Cassidy cited how the company's local government contracts typically run for seven to 10 years. Commercial and industrial clients often sign up for 3 or more years.
Adding to this is that Cleanaway's business is "largely insulated" from inflation via contract terms that allow pricing to move up if expenses do.
"The key costs for CWY are labour, waste disposal and fleet costs (fuel, repair and maintenance, etc)," said Cassidy.
"Rise and fall clauses in contracts capture relevant labour fuel and general CPI changes."
Cleanaway also has a dominant position in an industry that has very high barriers to entry.
The share price has fallen almost 20% year-to-date, and Wilsons reckons the sell-off is overdone.
"Cleanaway trades on a 12-month forward PE of 27x. We think this is a reasonable multiple for a quality defensive in a market-leading position, with long-term contracts insulated from inflationary pressures," said Cassidy.
"This multiple also looks reasonable relative to the 25% growth expected over the next few years for Cleanaway."
