With there being considerable uncertainty among investors regarding the outlook for the global economy, companies that offer growth potential are in-demand. Clearly, this is nothing new, but if the world economy does endure a downturn then companies which are still able to post above average earnings increases could see their ratings rise at a rapid rate.
As a result, it seems likely that online fashion retailer ASOS (LSE: ASC) will command a relatively high valuation in the coming years, since it is expected to significantly grow its bottom line. In fact, with ASOS due to post a rise in its bottom line of 24% next year, it seems to be on the cusp of putting the challenges of previous years behind it. And, with its international strategy of investing in pricing expected to develop a degree of customer loyalty in the medium term, its long term outlook as an international fashion retailer appears to be relatively secure.
The problem, though, is that ASOS already trades on a price to earnings (P/E) ratio of 65. That’s despite its shares falling by almost a quarter in the last six months. Therefore, while as a business it appears to be on the up, investors may balk at its valuation moving forward – even if it remains an excellent growth company.
The opposite may prove to be true for pharmaceutical company BTG (LSE: BTG). Its trading update today has wiped 9% off its valuation as it warned that sales for the full year are now due to be towards the lower end of market expectations. The key reason for this is a failure to translate interest in the company’s varicose vein treatment Varithena into sales growth and, with mixed performance elsewhere, it means that BTG’s valuation has taken a hit.
Due to this, BTG now trades on a price to earnings growth (PEG) ratio of just 0.5, which indicates that it offers growth at a very reasonable price. Certainly, today’s update is disappointing but it remains a high quality business with considerable growth potential. For investors who can stomach high levels of volatility, its valuation indicates that it is a strong buy.
Meanwhile, Sainsbury’s (LSE: SBRY) impressed the market recently with an upgrade to its growth outlook. It stated that full year results will be slightly ahead of expectations and, more importantly, its strategy is on-track. Furthermore, there has been a stabilisation in the decline in average basket spend and Sainsbury’s new pricing campaign, coupled with improved own-brand products, is beginning to resonate well with customers who are benefitting from increasing disposable incomes in real terms.
So, while Sainsbury’s is not expected to grow its earnings in the near term, its longer term outlook is beginning to look increasingly positive. It currently trades on a P/E ratio of just 12.7 and, with a sound strategy which is focused on providing an improved customer experience and generating efficiencies, it looks likely to return to positive growth in the coming years. Therefore, alongside BTG, it appears to be worth buying right now.
