2014 has been nothing short of horrific for investors in ASOS (LSE: ASC). That?s because shares in the online fashion retailer have fallen by a whopping 63% since the turn of the year and show little sign of recovering anytime soon.
While sector peer Sports Direct (LSE: SPD) has seen its share price fall by 12% in 2014, it seems to be a more promising investment than ASOS. The same goes for Next (LSE: NXT), despite being up an impressive 25% year-to-date. Here?s why that…
2014 has been nothing short of horrific for investors in ASOS (LSE: ASC). That’s because shares in the online fashion retailer have fallen by a whopping 63% since the turn of the year and show little sign of recovering anytime soon.
While sector peer Sports Direct (LSE: SPD) has seen its share price fall by 12% in 2014, it seems to be a more promising investment than ASOS. The same goes for Next (LSE: NXT), despite being up an impressive 25% year-to-date. Here’s why that could prove to be the case.
Although the challenges that ASOS is facing as it seeks to roll out its successful UK business abroad are very understandable, it means that there is little prospect of bottom-line growth over the next year or two. Indeed, the company’s earnings are expected to fall by 19% in the current year and flat line next year. For a company that has appealed solely to growth investors in the past, this is clearly not good news.
Indeed, it contrasts sharply with the future potential of Next and Sports Direct. For example, Sports Direct is forecast to increase earnings by 24% in the current year and by 16% next year, while Next’s numbers are also very impressive. It is due to improve its bottom line by 16% in the current year and by a further 9% next year.
So, while profit for next year is due to be 20% below last year’s figure for ASOS, it could be as much as 44% higher at Sports Direct and 26% greater at Next.
Despite shares falling by 63% since the start of the year, ASOS still trades on a very rich valuation. For example, it has a price to earnings (P/E) ratio of 55.2, which seems excessive given the lack of growth potential on offer over the next couple of years.
Furthermore, it seems hugely overpriced when compared to Sports Direct and Next. They trade on P/Es of 16.4 and 16.7 respectively, which equate to price to earnings growth (PEG) ratios of 0.7 (Sports Direct) and 1.1 (Next) – both of which highlight growth at a reasonable price.
So, while ASOS may have significant long-term potential, it seems as though this is more than priced in. As a result, the company’s share price could come under further pressure in the short run. Meanwhile, Sports Direct and Next offer consistently strong growth at a very reasonable price. As a result, they appear to be the better options over the medium term.
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Peter Stephens 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.