Its a fickle business to invest in, the rag trade, and the fortunes of three of the UKs favourite fashion stocks show how differently things can turn out.
On the one hand, we have high-street supremo NEXT (LSE: NXT) and upmarket designer Burberry (LSE: BRBY)(NASDAQOTH: BURBY.US) both hitting new 52-week highs, and on the other theres online retailer ASOS (LSE: ASC)(NASDAQOTH: ASOMF.US) sitting on a 12-month fall of 51%.
Nice gains
NEXT shares have been on a climb since mid-December, taking the price up 13% over 12 months to a closing high of 7,370p on Thursday. That leaves them on a forward P/E of 18 based on expectations for the year ended January 2015, but two more years of forecast growth would take that down to a little under 16 in two years time. That still perhaps looks a bit toppy, but quality companies can command high valuations for lengthy periods.
Burberry shareholders have had an even better year, with a 25% gain over 12 months to Thursdays record of 1,913p although over five years the positions are reversed, with Burberry up 204% against NEXTs 293%.
Valuations are quite different, too, with Burberry shares afforded a P/E of 25 on forecasts for March 2015, dropping only as far as 20 by 2017. Theres a fair bit of future growth built into the current price, and Burberry might be capable of justifying it but at these levels even the slightest disappointment could send the price down sharply.
Rocky ride
Then we come to ASOS, whose shares were trading for more than 70 at the start of 2014 before slumping to a low of just 17.42 by October. Of late theres been a bit of a recovery, and the price has almost doubled from that depressed point to 32.48 as I write for many a doubling in such a short period would be great news, but heart-stopping swings like this are standard fare for ASOS investors.
But its when we look at the firms P/E that our eyes really start watering. After two years of crashing earnings and a further 6% fall forecast for the year to August 2015, were still looking at a multiple of 79! Theres an earnings recovery pencilled in for 2016, but that would still drop the ratio only to 62 wed need earnings to more than quadruple to get the P/E down to the market average of 14 at todays share price.
Time to buy?
Should we buy any of these now? Well, I reckon the whole business is looking overheated, and the only one of these Id consider is NEXT but even then I think there are better bargains out there.
As for ASOS, with the growth needed to justify todays valuation, and the competitive shocks a business with such razor-thin margins can face, I reckon its a pure gamble and I dont do that.
Avoiding high-risk fashion shares and sticking to a tried and trusted formula could help you to Buffett-style wealth.
To find out more, get yourself a copy of the Motley Fool’s special 7 Simple Steps For Seeking Serious Wealth report, which shows you how investing in shares has wiped the floor with every other form of investment over the past century and more.
It’s completely FREE, so click here for your personal copy and get started today.
Get FREE Issues of The Motley Fool Collective
Get straightforward advice on whats really happening with the stock markets, direct to your inbox. Help yourself with our FREE email newsletter designed to help you protect and grow your portfolio wealth.
By providing your email address, you consent to receiving further information on our goods and services and those of our business partners. To opt-out of receiving this information click here. All information provided is governed by our Privacy Statement.
Alan Oscroft has no position in any shares mentioned. The Motley Fool UK has recommended Burberry. The Motley Fool UK owns shares of ASOS. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.