ASOS (LSE:ASC) shares have ripped higher recently. Last month, the online fashion retailer saw its share price climb from 510.5p to 872.5p – a gain of 71%.
I own ASOS shares so I’m happy with the recent rebound. I’m still well down on my investment, however, as the shares tanked last year.
So, what’s the best move now? Should I buy more ASOS shares? Hold on to my existing stock? Or sell and cut my losses? Let’s discuss.
Why ASOS shares are flying
To answer these questions, let’s look at why the share price is rising right now. I can see four reasons for the jump.
One is that right now, we’re seeing a huge global rally in bombed-out, ‘high-beta’ growth stocks (high-beta stocks are those that move more than the broader market).
ASOS is certainly not the only growth stock to rip higher recently. There are a lot of shares that have risen 30% or more in the blink of an eye. It seems expectations that the US Federal Reserve is close to finishing its rate hikes is driving this rally.
Another reason is that the online retailer recently told investors that its turnaround plan is on track and that it expects to report “significantly improved profitability and cash generation” during the second half of the current financial year. This is encouraging news.
We are undertaking necessary strategic and operational changes, with our focus shifting from prioritising top-line growth to building a more relevant and competitive fashion business with a disciplined approach to capital allocation and ROI.
ASOS CEO José Antonio Ramos Calamonte
A third reason is that analysts at Bank of America recently upgraded the stock to ‘buy’. BoA’s analysts noted that the sector is trading at “undemanding” valuations and said that the risk-reward profile is skewed to the upside.
Finally, I reckon we’re seeing a huge GameStop-like ‘short squeeze’ here. ASOS is one of the most shorted stocks on the London Stock Exchange right now (shorting is the process of betting against a stock). Currently, around 10m shares are on loan, out of the free float of 65.3m shares.
As the share price has moved higher, some hedge funds will have bought the stock to cover their short positions. This will have pushed the share price up further.
My move now
In light of all these issues, I’m going to hold on to my ASOS shares for now.
I don’t expect the high-beta rally to continue forever. I also don’t expect the short squeeze to continue forever (although it could continue for a while as data shows that it would take short sellers about 11 days to fully cover their positions given average daily trading volumes).
However, I’m encouraged by the progress ASOS is making with its turnaround plan and management’s new focus on return on investment (ROI) and capital allocation.
And I agree with BoA’s analysts in relation to valuation. Currently the forward-looking price-to-earnings (P/E) ratio using next year’s (ending 31 August 2024) earnings forecasts is just 18. That seems quite low to me given the company’s growth potential.
Of course, I’m prepared for volatility here. News in relation to weak consumer spending, or the emergence of new competitors, could send the share price lower.
However, right now, the trend is up. And as they say in investment circles, the trend is my friend.
