I believe some of the best returns can be found with ASX shares that have been sold off but can rebound over the medium term.
Short-term issues can be long-term opportunities depending on the cause of a valuation decline. For example, ASX mining shares are linked to commodity prices and can be cyclical opportunities, whereas some companies may be in significant structural decline.
Investing in companies that keep falling with no potential recovery on the horizon is where major risk lies. That sort of situation is called a falling knife.
When I scan the S&P/ASX 300 Index (ASX: XKO), I see some companies that might have turnaround opportunities over the next two or three years. Below are three of my contrarian ideas.
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Johns Lyng Group Ltd (ASX: JLG)
Johns Lyng provides repair and restoration services for buildings and contents in Australia and the United States that have been damaged by events such as impacts, storms, and flooding.
In the last 12 months, the Johns Lyng share price has fallen more than 30% after the company gave guidance for FY25 which was disappointing for the market. Its catastrophe-related earnings are projected to drop significantly in FY25, which will affect the overall earnings.
However, I think the company's shares have been sold off as if the catastrophe hit to earnings is permanent. Bad weather is unpredictable and certainly not regular, but I think it'd be reasonable to say more large storms are likely in the coming years. The Helene hurricane is a very recent example in the US of how severe weather events can come along.
Megaport Ltd (ASX: MP1)
Megaport has built a platform to help businesses connect their infrastructure with "secure, scalable, and agile networks in just a few clicks".
The ASX share provided FY25 guidance for revenue between $214 million and $222 million while operating profit (EBITDA) is expected to be between $57 million and $65 million. That EBITDA guidance means that operating profit could be flat for the 2025 financial year if it hits the bottom end of the range.
A company's profit isn't necessarily going to grow strongly every single year, but the company is still working on growing in a variety of ways. Megaport said it remained committed to profitable and efficient growth. Megaport CEO Michael Reid said:
In fiscal 2025, Megaport will continue to leverage and grow our high-speed global backbone and 100G connectivity, expand into new markets and geographic locations, and prepare for additional capacity augmentations to meet the rising demand from AI.
With updated speed and pricing to improve our competitiveness on a global scale, we plan on continuing the rapid pace at which we innovate and expand our product sets, with a focus on low touch, incremental, high-revenue products.
I think its choices will help over the long term, and it looks much better value now that it's down 37% over the past year.
Audinate Ltd (ASX: AD8)
The Audinate share price has been volatile over the past five years due to COVID-19 impacts on its supply chain and prospective customer base.
This ASX share provides Dante, a global networking solution used in the professional live sound, commercial installation, broadcast, public address, and recording industries. Dante replaces traditional analogue cables.
The Audinate share price has fallen more than 50% since March 2024, making it a much better value to invest in now.
According to Audinate, the business is facing multiple revenue headwinds in FY25, including the shortening of order lead times, rebalancing of industry holdings across the industry, and the rate at which its manufacturing customers clear raw material inventory.
Audinate said it expected to generate a "marginally lower" gross profit in FY25 and see lower revenue before a "return to anticipated growth and more predictable order patterns in FY26".
The company is looking to manage its costs in FY25, and it's also considering potential acquisitions.
I think the business is capable of turning things around in FY26 and beyond because of the quality of its Dante offering, which can help increase its market share.
