Regular readers will already know that macroeconomics are dominating discussions about ASX shares at the moment.
Long-term company outlook has been put aside while the market is, rightly or wrongly, focused on inflation, rising interest rates, the war in Ukraine and a potential recession.
But if you can turn down the noise, there are some bargains out there.
That's because all those world events will sooner or later pass, and businesses with a positive outlook will likely win in the long run.
Taking this mindset, the team at the Firetrail Absolute Return Fund recently revealed two ASX shares they've bought — while explaining why you need not worry about the macro headwinds that forced their prices down this year:
Reforms are painful in the short-term but great in the long run
Network-as-a-service provider Megaport Ltd (ASX: MP1) has seen its share price just devastated this year.
In fact, in mid-November last year, it was touching $22, and now it trades in the high $6s. That's an almost 70% drop in eight months.
The Firetrail team told clients that Megaport has been caught up in the violent sell-off of technology shares and did have a quarterly update earlier this year that missed expectations.
But it is undergoing a structural change, so there is nothing to worry about in the long run.
"Megaport has recently moved its sales model to third party distribution via some of the world's largest B2B technology businesses such as Cisco Systems Inc (NASDAQ: CSCO)," read the Firetrail memo.
"Previously, all Megaport sales were done by their internal sales team."
Firetrail analysts explained how there was "significant value" in this change over the medium to long term.
"However, it has resulted in some short-term disruption, at a time where any growth company that misses expectations has been sold off materially," the memo read.
"The fund has added capital to the Megaport position on the back of the share price weakness and our conviction in the medium-term outlook for the company."
Why this time it's different for James Hardie
The share price for construction materials provider James Hardie Industries plc (ASX: JHX) has also had a shocking 2022.
The stock has lost a painful 40.7% since the start of the year.
The Firetrail team attributed this loss of confidence to rising interest rates, which kills demand for home loans.
"As a result, less houses are built, and there is less demand for related goods such as building materials, building products, fixtures and fittings," the memo read.
"The added possibility of recession will further deepen any downturn."
However, the analysts noted that the US housing market, where James Hardie makes much of its revenue, was very different to the last downturn during the global financial crisis (GFC).
There has been a chronic underbuild of new homes since the scarring of the GFC, a COVID-induced backlog of construction, and new housing stock remains at just three months of supply.
But most important to James Hardie is the deterioration of existing housing.
"The median age of a house in the US has increased from 32 years old pre-GFC to over 40 years old today."
This means that, notwithstanding any housing construction slowdown, James Hardie products will enjoy elevated demand from renovations.
"Repair and renovations spending has historically been less volatile and less cyclical than new housing construction."
So there is a disjoint between market perceptions and business reality.
"Fortunately for James Hardie, about 65% to 70% of its revenue comes from repair and renovations activity," read the Firetrail memo.
"However, James Hardie's stock price trades very closely with new home builders in the US."
For the Firetrail team, this presents a golden opportunity for the patient investor.
"The material product mix and margin opportunity on offer for James Hardie gives us further confidence in the earnings profile, suggesting the current market dislocation and de-rating presents a compelling opportunity over the medium term."
