BLOG: ASOS – A lesson in over-optimism

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16/09/2014
The recent troubles at ASOS highlight an important lesson about investing in the stock market - growth is not enough.

On the face of it, ASOS looks like a great business. Its overall retail sales growth is 15 per cent. It is internationally diversified, tapping into higher growth emerging markets. It is also in a sector seeing particularly high capital growth. The latest figures from IMRG Capgemini e-Retail Sales index showed that online clothing sales are rising 20 per cent year on year, and momentum is building.

Yet its shares have dropped almost 60 per cent over the past year.

The problem has been seen many times in markets before. Expectations become too high and when a company falters – because almost no company can sustain an exceptionally high growth rate indefinitely – the market treats the shares savagely.
The lesson for investors is to pay forensic attention to the price they are paying for any company. It may be a brilliant company, but if everyone knows it, it is likely to be fully reflected in the price. That means the share price can only go one way if the company loses its sheen. Down.

Counterintuitively, this may now be a good time to buy ASOS, particularly if investors think that the problems with its international business may now be resolved. That said, it still trades with a share price that values the company at around 50x its current annual earnings.

As Helal Miah, investment research analyst at The Share Centre, says…”ASOS disappointed the market this morning as revenues sales growth fell below market expectations. Revenues were up 16 per cent compared to the same period last year and 27 per cent for the full year, resulting in the share price taking a hit in early morning trading. The fire at its Barnsley distribution centre in June have impacted figures more than expected and it is estimated to hit sales by around £25-£30m. The strength of sterling compared to the same period last year has also dampened the figures from international operations.

“We continue to recommend ASOS as a ‘hold’ for investors while the business goes through a difficult time. Competition is strong and heavy investment into infrastructure will take its toll on the earnings in the short term. However, the business is still growing rapidly and the brave contrarian investor could consider this as a long term investment.”

 

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