On 21 October,one ofASOSs(LSE: ASC)Executive Directors,Nick Beighton, spent just under 500,000 acquiring 22,150 ASOS shares agreat vote of confidenceby any measure.
This huge trade was placed just after ASOS unveiled a 14% fall in full-year pre-tax profits to 47m, thanks to the impact of a strong pound, infrastructure investments and a huge fire at the companys Barnsley warehouse.
Still, ASOSs shares rallied after the release of these results, as the company beat City expectations. Whats more, sales are still growing at an annual rate of more than 25%, a rate of growth that many companies would pay handsomely to achieve.
That being said, profits areexpected to remain constant for the next year or so, as the group invests for growth. After this period of investment, ASOS should be well placed to start growing again and out manoeuvre competitors.
Calling the bottom
After several profit warnings this year, investors had all but given up on ASOS heading into last weeks results. The companys shares have fallen around 62% year to date, a decline that would leave even the most seasoned investor concerned.
However, it would appear as if Mr Beighton has timed the market correctly with his share purchase, picking a bottom in ASOSs declines. Now, the companys shares have begun to head higher again and it could be the time to buy in.
Lower valuation
ASOSs declines over the past 12 months have been powered by the companys own success. As sales and profitability grew rapidly, investors were prepared to pay a premium for ASOSs shares. Indeed, during 2013 ASOS traded at a P/E ratio of around 100, a sky-high multiple that left plenty of room for disappointment.
However, now the companys forward P/Ehas declined to a still high, but manageable 49. Whats more, many City analysts and investors alike believe that as ASOS is not a traditional retailer, it should be valued on sales not earnings. Using this metric, the company is now significantly undervalued compared to sector peers.
Specifically, ASOS currently trades a price to sales ratio of around two, peerBoohoo.comcurrently trades at a P/Sratio of 4.5, Next trades at a P/Sratio of 2.5 and Burberry trades at aP/S ratio of 4.3. So, after taking these figures into account it seems that at current levels, ASOS is undervalued compared to sector peers.
Its up to you
Still, while now may be the time to buy ASOS as the companys shares power higher, following a set of better-than-expected results,only you can decide if ASOS still deserves a place within your portfolio.
If ASOS is not for you, there are other opportunities out there.The key, when searching for growth stocks, is looking under the radar. You want to get on board while the company is still an unknown quantity.
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Rupert Hargreaves 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.
