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Why I’d Still Sell ASOS plc Even After Recent Declines

ASOS

It’s been an extremely difficult 2014 for investors in ASOS (LSE: ASC). That’s because the share price of the online fashion retailer has plummeted by 68% since the start of the year, with the company experiencing three profit warnings in recent months. Although shares are now much cheaper and the company has a bright long-term future, I think it’s worth waiting for an even lower price before buying. Here’s why.

International Challenges

The performance of ASOS in its ‘home’ market, the UK, continues to be very strong. Indeed, the business is hugely popular among young adults, with its own-brand gaining traction in recent years and allowing the company to expand margins. However, it’s the performance of the brand abroad that is causing the company a headache.

As with any business that attempts to expand into new markets, there are set-up costs, delays and a chance that the product will not be as well received as in the ‘home’ market. This seems to be true of ASOS’s expansion into countries such as China, where the company has been less successful than it envisaged. As a result, net profit is forecast to fall by around 19% in the current year and remain flat next year. For a stock that is considered a growth play, that’s simply not appealing enough to warrant purchase.

Valuation

Despite having disappointing forecasts, ASOS continues to trade on a valuation multiple that seems excessive. For instance, shares in the company currently have a price to earnings (P/E) ratio of 48.1. That’s 3.5 times the P/E of the FTSE 100 and, incidentally, the wider market is expected to grow at a faster rate that ASOS in the current year and next year.

So, what are investors paying for?

Clearly, ASOS has considerable long-term potential. It appears as though, in time, it will prove to be a success both in the UK and internationally. However, this is not guaranteed and, on the evidence thus far, if it does happen then it is likely to take a lot longer than the market is currently pricing in.

Looking Ahead

Were ASOS to trade on a smaller premium to the wider market then it could be a tempting long-term buy. However, with a tough couple of years ahead of it, as it tries to improve its performance on the international stage, ASOS’s share price could come under more pressure. As a result, it may be worth holding off and waiting for a keener price before buying a slice of ASOS.

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Peter Stephens does not own shares in ASOS. The Motley Fool owns shares in ASOS.