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Don’t be a fashion victim. Avoid these growth shares!

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Can you remember what you were doing on 3 October 2001? If you’re scratching your head and pulling strange faces trying to remember, then don’t worry, I can’t remember either. But I can tell you for certain what I wasn’t doing, and that’s buying shares in ASOS (LSE: ASC). I should have been buying shares in the online fashion retailer when it was first launched on the Alternative Investment Market (AIM) at just 3p. I repeat, three pence!  They’re currently at 5,186p.

A cool million

Today, anyone who had bought just £600 worth of ASOS shares at the IPO price, will be sitting on a cool £1m worth of pure investing pleasure. Those savvy, or even lucky investors who sold their shares at their 2014 peak of 7,050p will have made even more. But we all know that ASOS is just one of a number of amazing and magical success stories that have graced the London Stock Exchange over the years, and it’s these stories that drive many novice investors to the Stock Market in the first place.

But before you jump onto the junior AIM market and grab the first pharmaceutical or mining company that makes your heart flutter, a word of caution. Many, if not most, young companies with bright prospects that are listed on the junior AIM market either don’t live up to their potential, or just die completely, taking all your money with them.

If picking stocks requires careful research and analysis, then picking small-cap or AIM stocks requires even more careful consideration, attention and caution. Image losing 99% of your original investment, or even 100%. It happens more often than you might think.

Hefty price-tag

So getting back to ASOS. Is it still a good investment, or is it too late to join the party?

Well, investors were certainly cheered by the retailer’s full year results last month, with the company beating forecasts and announcing that it would now accelerate its growth investment plans. Retail sales were up 26% with strong performances in all its major UK, US and European markets, with continuing profit before tax and exceptional items up by an impressive 37% to £62.7m.

The City is also optimistic about the company’s prospects, projecting a further 22% rise in underlying earnings for the year to the end of August 2017, on higher revenues of £1.8bn. But all this comes at a price, with ASOS now trading on an astronomical P/E rating of 69 for fiscal 2017. At these levels the share price could easily collapse if ASOS fails to meet market projections, as it did in 2014. I fear the expectations are too high and risks too great at the moment.

No longer a secret

Another AIM-listed online retailer that may have caught your eye is of course Boohoo.com (LSE: BOO). Being smaller than ASOS some might argue that it has far greater growth potential, and I would agree. The company has grown from being Manchester’s best kept fashion secret to one of the fastest growing international online retailers.

But Boohoo.com is no longer a secret, and this year bullish investors have driven the share price up by a massive 250%. The online retailer says it sells cutting-edge design with an affordable price-tag, sadly at 71 times forward earnings, the same can’t be said of its shares.

A better retail pick?

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Bilaal Mohamed has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended boohoo.com. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.