Investors in ASOS (LSE: ASC) (NASDAQOTH: ASOMF.US) have had a rather mixed week, with the company’s share price firstly being hit by the news that CEO and founder, Nick Robertson, has sold around 10% of his total stake in the company for £20m. This news caused the company’s share price to fall by around 2.5% and understandably made shareholders in ASOS feel somewhat nervous regarding the company’s future prospects.
These nerves, though, now seem to have dissipated, since shares in ASOS are up 12% today even though there has been no further significant news flow. In fact, the sharp rise in the company’s share price could be due to the reason for the CEO’s share sale, with it now emerging that it was simply to fund a tax bill. As such, it is unlikely to be reflective of his view regarding the company’s future prospects and, in any case, he still owns over 8% of the company that he founded and still runs.
Priced For Success
While ASOS does have a genuinely bright future and undoubtedly enjoys a very enviable position as the ‘go-to’ online fashion retailer for twentysomethings, it is very much priced for success. In other words, if it is as successful as the market believes it will be (and it has exceptionally optimistic expectations) then its current valuation could be justified. However, anything less and ASOS’s valuation could come under pressure and lead to further falls in its share price – as was the case last year when its valuation fell by a whopping 59%.
So, while the CEO’s share sale is not a reason to sell, the company’s current valuation could be for me. For example, ASOS trades on a price to earnings growth (PEG) ratio of 1.8, which appears to be overly generous given its recent track record of profit warnings. In fact, looking ahead, it would be of little surprise for ASOS to experience something of a ‘two-speed’ performance profile, with its UK operations continuing to provide stunning growth as the UK economy improves and disposable incomes rise, while its international operations could continue to provide logistical challenges and much lower growth rates.
As such, and even though recent months have left many ASOS shareholders in loss-making territory on their investment, ASOS’s share price could come under pressure this year. As a result, and irrespective of the CEO’s share sale, I personally feel that now could be the right time to exit and look elsewhere for better value stocks.
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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.