I dont know if the growth story at ASOS (LSE: ASC) is over, but if I were invested then Id sell ASOS shares to buy eitherAssociated British Foods(LSE: ABF) orTed Baker (LSE: TED) right now. Heres why.
Better Alternatives Than ASOS
I dont dislike ASOS, although its profitability is likely to remain under pressure for some time. I also dont think its shares are incredibly expensive, either, but I expect them to be more volatile than those of Ted and ABF in the run-up to Christmas and into the first quarter of 2015.
ASOS stock has been looking for direction since July. Of course, it may rally to 31.5, as Goldman Sachs recently pointed out, but theres also a chance that it will trade in the 18-26 corridor until the end of next year, based on fundamentals. ASOS shares change hands at 23, about 30% above their 52-week low.
The average price target from brokers is in the region of 28, for an implied forward price to earnings ratio of 63.7x. ASOS is debt-free and profitable, but it needs to grow revenue at a fast pace to deliver value into 2015.
Ted Baker: One For The Medium Term!
Ted Baker is less than half the size of ASOS, with a market cap of almost 1bn and revenue of more than 3o0m.
While a bigger and diversified retailer such as NEXT has struggled in recent weeks, Ted stock has rallied by 16% in the last three months, in spite of the mild weather in the UK.
Theres a lot to like in Teds geographical mix: the business is swiftly growing in North America and Asia. As the roll-out of stores overseas continues, online sales show an outstanding performance. Fundamentals are strong, managers know what they are doing, and hefty margins look solid. Ted Bakers relative valuation 26x forward earnings, 15x adjusted cash flow and 2.5x sales still offers plenty of upside into 2015, in my view.
The average price target from brokers has risen to 27 from 14 in the last 18 months. The stock, which trades at 21.4, will soon test its record highs, in my view, and Id buy it ahead of Teds trading update in mid-January. This is an investment for the medium term.
ABF Trades At Record Highs, So What?
Talking about stocks trading at record highs in this sector, how not to mention the owner of Primark, Associated British Foods?
With its 13.5bn of revenue, ABF dwarfs both ASOS and Ted Baker. This is a mature business that continues to deliver terrific growth, although Goldman Sachs suggests downside for shareholders could be up to 20%. So what?
The average price target from brokers has gone up to 30 from 20 in the last 12 months. You are now officially betting against analysts: itd be fun to be proved right in 12months if, as I think, ABF stock will comfortably trade at 40. Thats likely, particularly if management entertain extraordinary corporate activity.
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Alessandro Pasetti has no position in any shares mentioned. 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.
