Why I’d Sell ASOS plc And Buy Associated British Foods plc or Ted Baker plc

I don’t know if the growth story at ASOS (LSE: ASC) is over, but if I were invested then I’d sell ASOS shares to buy either Associated British Foods (LSE: ABF) or Ted Baker (LSE: TED) right now. Here’s why. 

Better Alternatives Than ASOS 

I don’t dislike ASOS, although its profitability is likely to remain under pressure for some time. I also don’t think its shares are incredibly expensive, either, but I expect them to be more volatile than those of Ted and ABF in the run-up to Christmas and into the first quarter of 2015.

ASOS stock has been looking for direction since July. Of course, it may rally to £31.5, as Goldman Sachs recently pointed out, but there’s also a chance that it will trade in the £18-£26 corridor until the end of next year, based on fundamentals. ASOS shares change hands at £23, about 30% above their 52-week low.

The average price target from brokers is in the region of £28, for an implied forward price to earnings ratio of 63.7x. ASOS is debt-free and profitable, but it needs to grow revenue at a fast pace to deliver value into 2015.

Ted Baker: One For The Medium Term!

Ted Baker is less than half the size of ASOS, with a market cap of almost £1bn and revenue of more than £300m.

While a bigger and diversified retailer such as NEXT has struggled in recent weeks, Ted stock has rallied by 16% in the last three months, in spite of the mild weather in the UK.

There’s a lot to like in Ted’s geographical mix: the business is swiftly growing in North America and Asia. As the roll-out of stores overseas continues, online sales show an outstanding performance. Fundamentals are strong, managers know what they are doing, and hefty margins look solid. Ted Baker’s relative valuation — 26x forward earnings, 15x adjusted cash flow and 2.5x sales — still offers plenty of upside into 2015, in my view.

The average price target from brokers has risen to £27 from £14 in the last 18 months. The stock, which trades at £21.4, will soon test its record highs, in my view, and I’d buy it ahead of Ted’s trading update in mid-January. This is an investment for the medium term.

ABF Trades At Record Highs, So What? 

Talking about stocks trading at record highs in this sector, how not to mention the owner of Primark, Associated British Foods?

With its £13.5bn of revenue, ABF dwarfs both ASOS and Ted Baker. This is a mature business that continues to deliver terrific growth, although Goldman Sachs suggests downside for shareholders could be up to 20%. So what?

The average price target from brokers has gone up to £30 from £20 in the last 12 months. You are now officially betting against analysts: it’d be fun to be proved right in 12 months if, as I think, ABF stock will comfortably trade at £40. That’s likely, particularly if management entertain extraordinary corporate activity.

Associated British Foods and Ted Baker will reward you with excellent returns and a bit of extra income from dividends, but you can find similar opportunities in less cyclical sectors: our research identifies The Motley Fool's top stocks for 2015, which promise capital gains of between 10% and 20%. 

Of course, you should do your homework before investing, but this ad-hoc report will help you investigate prospects and trailing performances of a few valuable players in the UK. The report is completely free for a limited amount of time and comes without further obligations

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Alessandro Pasetti 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.