One Big Reason Why I Would Sell ASOS plc And Buy Boohoo.Com PLC

Shares in online fashion retailer ASOS (LSE: ASC) jumped last week after it emerged that co-founder Nick Robertson had sold some of his shares in the company.

However, based on historical trends, this sale by Robertson should be interpreted as a warning, not reason to celebrate. 

Time to sell up?

Robertson’s sale came after a month of gains for ASOS’s shares. Year to date, the company’s shares have gained just under 21%, and it seems as if Robertson was looking to take advantage of improved market sentiment. 

Indeed, according to data supplied by the Financial Times, nearly every large share sale conducted by Robertson has been followed by a deluge of bad news from the company. For example, during the fourth quarter of 2013, Robertson sold just over one-and-a-half million shares in the retailer. Within six months, ASOS’s shares had fallen 50% as sales growth started to slow, and the company issued several profit warnings.

Something similar happened during 2012, when Robertson sold around 750,000 shares, only to announce four months later that ASOS’s gross margin had contracted by 90bps. Two years earlier, during July of 2010, Robertson sold nearly 1.8m shares. 12 months later the company announced that for the year ending March 2011, pre-tax profits had fallen by 23%. 

So, based on the above information, it would appear that it could be time to follow Robertson’s lead and sell ASOS. 

Another signal 

On the other hand, while ASOS’s management has been busy selling shares, Boohoo.Com’s (LSE: BOO) management team has been increasing its stake in the online fashion upstart. 

Boohoo’s has fallen by 42% year to date, but the company’s management don’t seem to be worried. Since issuing a Christmas profit warning at the beginning of January, Boohoo’s management team has swallowed up nearly 600,000 shares in the company, around £140,000 of stock. 

And management buying is a great signal to investors. There is plenty of data that supports this conclusion. According to research between 1975 to 1994, stocks following insider buying outperformed the market by 4.5%. These results weren’t just picked out of the air. Over one million transactions were studied over the period to arrive at this result. 

Unfortunately, Boohoo’s management now expects full-year profit to be around 26% lower than initially predicted, as a marketing push failed to deliver the level of sales growth expected. But at present levels, the company is trading at a PEG ratio of 0.7, indicating growth at a reasonable price. So, for those willing to take the risk, Boohoo could be an attractive growth play.

The bottom line

Overall, it appears that Boohoo could be a better bet than ASOS based on historical trends and management trading activity. Nevertheless, only you can decide if either fits in your portfolio and I thoroughly recommend that you do some additional research before making a trading decision.

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Rupert Hargreaves 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.