Why it’s time to buy shares of Asos
Few shares (or shareholders) have been on such a rollercoaster ride as those of the online fashion retailer Asos (LSE: ASC). Between 2010 and early 2014, the share price increased tenfold, then fell by around two-thirds. Since then, Asos has gone through several more boom and bust cycles. It rallied during the pandemic, when analysts predicted it would benefit from the shift to online retail caused by the closure of physical stores. But as the global economy reopened, stocks hit another stumbling block – the price is down 70% from the same time last year. Is this a buying opportunity, or should it drop further?
I believe this is the first. Despite the ups and downs of the Asos share price, it continues to benefit from strong sales growth. Sales have risen from £1.45bn in 2016 to £3.91bn in 2021. This equates to a 171% increase – or 22% per year. While some of the growth generated by the pandemic will disappear as people return to shop at brick-and-mortar stores, analysts still expect Asos sales to continue growing this year. and in 2023, although at a slightly slower pace.
Asos looks cheap compared to history
Of course, earnings have been a bit more volatile than sales. Profits are expected to fall by a quarter this year, partly due to mounting inflationary pressures. However, they are expected to rebound in 2023 – and again the general trend is positive, with profits increasing fivefold between 2016 and 2021. Asos has also been able to deploy its capital efficiently, with a return on investment of more than 10 %.
Asos has taken further steps to ensure continued growth beyond the next few years. Last year it bought several key brands from the Arcadia Group wreck, including Topman, Topshop, Miss Selfridge and HIIT. Not only will this help her increase her sales and market share, but it will also benefit her profit margins, compared to just selling apparel made by third parties. The company is also investing in additional warehousing and distribution capacity, which will help improve service and control costs.
But perhaps the most compelling reason to buy Asos today is its valuation. Years of growth, combined with the poor performance of its shares, have transformed it from one of the most overvalued stocks in the market into a company now valued as a mature company, not a company with years of strong growth. in front of her. It now trades at only 13 times 2023 earnings, which is a very low level given its past record high.
Of course, just because a stock is oversold doesn’t mean it can’t fall further before rallying. So, with Asos shares still well below their 50 and 200 day moving averages, I wouldn’t immediately go long, but rather wait for them to hit over 1,800 pence. When this happens I would go long at £2 for 1p, putting the stop loss at 1,305p. That would give you a £990 downside.
Trading techniques… what’s in a name?
Over the past two years, several large companies have changed their names. Most notable was Facebook’s decision to rebrand itself as Meta Platforms (aka Meta) in late October. Mark Zuckerberg, chief executive of the social media giant, touted the move as a move reflecting the company’s long-term shift from traditional social media to the “metaverse” (which involves, among other things, virtual reality). Cynics argued that this was an attempt to distract from slowing growth (especially among younger users) and the looming threat of regulation. Granted, the move doesn’t seem to have helped Meta/Facebook’s stock price, down a third over the past five months.
Still, there’s definitely evidence that a name change can work in the short term if it shows a company is jumping on the bandwagon. For example, a 2002 study by Michael Cooper and others of Purdue University’s Krannert School of Management found that during the dotcom boom of the late 1990s, companies that opted for names with the term “.com” outperformed the market by 74% within the next ten days. A follow-up study by Cooper two years later found that when the bubble collapsed, companies that dropped “.com” from their name also outperformed.
However, in the longer term, a name change is rarely a good sign. A 2007 study by Panagiotis Andrikopoulos of Coventry University, and Arief Daynes and Paraskevas Pagas of the University of Portsmouth, looked at 803 name changes in the UK from 1987 to 2002. It found that companies that rebrands lagged the market for periods of up to 36 months, regardless of how well or poorly they performed prior to the rebrand.