WARNING: You’re Missing Out On The ASOS plc Recovery

On 21 October, one of ASOS‘s (LSE: ASC) Executive Directors, Nick Beighton, spent just under £500,000 acquiring 22,150 ASOS shares — a great vote of confidence by any measure. ASOS

This huge trade was placed just after ASOS unveiled a 14% fall in full-year pre-tax profits to £47m, thanks to the impact of a strong pound, infrastructure investments and a huge fire at the company’s Barnsley warehouse.

Still, ASOS’s shares rallied after the release of these results, as the company beat City expectations. What’s more, sales are still growing at an annual rate of more than 25%, a rate of growth that many companies would pay handsomely to achieve.

That being said, profits are expected to remain constant for the next year or so, as the group invests for growth. After this period of investment, ASOS should be well placed to start growing again and out manoeuvre competitors. 

Calling the bottom 

After several profit warnings this year, investors had all but given up on ASOS heading into last week’s results. The company’s shares have fallen around 62% year to date, a decline that would leave even the most seasoned investor concerned. 

However, it would appear as if Mr Beighton has timed the market correctly with his share purchase, picking a bottom in ASOS’s declines. Now, the company’s shares have begun to head higher again and it could be the time to buy in. 

Lower valuation

ASOS’s declines over the past 12 months have been powered by the company’s own success. As sales and profitability grew rapidly, investors were prepared to pay a premium for ASOS’s shares. Indeed, during 2013 ASOS traded at a P/E ratio of around 100, a sky-high multiple that left plenty of room for disappointment. 

However, now the company’s forward P/E has declined to a still high, but manageable 49. What’s more, many City analysts and investors alike believe that as ASOS is not a traditional retailer, it should be valued on sales not earnings. Using this metric, the company is now significantly undervalued compared to sector peers.

Specifically, ASOS currently trades a price to sales ratio of around two, peer currently trades at a P/S ratio of 4.5, Next trades at a P/S ratio of 2.5 and Burberry trades at a P/S ratio of 4.3. So, after taking these figures into account it seems that at current levels, ASOS is undervalued compared to sector peers. 

It’s up to you

Still, while now may be the time to buy ASOS as the company’s shares power higher, following a set of better-than-expected results, only you can decide if ASOS still deserves a place within your portfolio.

If ASOS is not for you, there are other opportunities out there. The key, when searching for growth stocks, is looking under the radar. You want to get on board while the company is still an unknown quantity.

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Rupert Hargreaves has no position in any shares mentioned. The Motley Fool UK has recommended Burberry. 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.