I must be feeling sentimental – it happens at this time of year – but I’ve been poring over some of my old stock picks, to see how they turned out.
Ups and downs
The first article that jumped out was published in December last year, under the headline: The 40% ASOS crash might be the perfect time to buy the Boohoo share price. At the risk of making myself look foolish, I thought I’d look at how those two online fashion retailers have fared in the 12 months since then.
At time of writing last year, so-called King of AIM ASOS (LSE: ASC) had just seen its shares crash 40%, after reporting a significant deterioration in November trading, which it blamed on economic uncertainty, weaker consumer confidence, and high levels of discounting and promotional activity, as retailers scrapped for market share.
By contrast, fellow AIM flyer Boohoo Group (LSE: BOO) was cutting a dash after posting record Black Friday sales across the group, and continuing to trade comfortably in line with market expectations.
My conclusion? Both were hugely expensive, with ASOS trading at more than 26 times earnings, and Boohoo 47 times, but the latter had the edge: “I’d buy Boohoo over ASOS, but it does look pricey, given the risks.”
So how did that turn out? Rather happily, so far. The Boohoo share price is up almost 55% over the past 12 months, while ASOS is down 37%. Although I would never have imagined they would have shot off on such entirely different trajectories.
Boohoo’s December update is a carbon copy of last year’s, with another record Black Friday weekend performance, and the stock trading “comfortably in line with market expectations”. New-to-the-group brands Karen Millen, Coast, and MissPap have been successfully integrated onto its platform.
In September, it reported a “robust balance sheet”, with net cash up 33% to £207.4m, and free cash flow up 22% to £30.1m. The inevitable result is that the £3.22bn group is now whoppingly expensive, trading at 60.1 times forward earnings.
Forecast earnings look set to slow after four incredible years, which saw figures of 48%, 101%, 48% and 28%. City analysts expect 25% growth both this year and next, which most companies would kill for, but it can’t afford any slips given that towering valuation.
A tricky year
This year has been a mixed bag for ASOS, which posted an 87% drop in pre-tax profits to £4m in April, as it suffered from warehouse IT issues, slowing active customer growth, and a failure of price cuts to boost sales. The share price spiked after October’s finals showed a 13% rise in retail sales to £2.66bn with strong growth across all its global markets, but it has slipped again.
The ASOS market cap has now halved from its peak of £5bn to hit £2.5bn, but the future could still be bright, with analysts forecasting earnings growth of 82% in the year to 31 August 2020. It needs all the growth it can muster, as it now trades at an almighty forward valuation of 100 times earnings.
Both Boohoo and ASOS have a massive market to aim at as online retailing grows around the world. But today’s valuations are just too high for me to recommend either of them this time round. Now let’s see what 2020 holds.
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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.