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This stock’s just surged 10%! Should you buy it for your ISA?

AO World (LSE: AO) is a stock that really charged in Friday business. The electricals retailer finished 10% higher in end-of-week business and was creeping back towards the six-month highs just shy of 100p punched in late December. I fear, however, that investors are getting a little too giddy given the fragile outlook for the UK retail sector, and suggest that a correction could be coming for AO World given the bulky share price gains of late 2019 and early 2020.

If anything my cautiousness has increased further after the Bank of England released data today on consumer borrowing. According to Threadneedle Street, the yearly growth rate in unsecured lending dropped to 5.7% in November from 6.1% in the previous month. Meanwhile net consumer credit of £600m last month was the smallest flow for six years and well down from the average of £1.1bn since July 2018.

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Big ticket blues

Taken in tandem with the poor retail figures that we have been seeing over the past year, these numbers from the Bank illustrate just how stark the growing reluctance of consumers to part with their cash is becoming. And naturally, sellers of big ticket electrical items like AO World should be particularly worried, as sales of the items it sells (whether essentials or luxuries) are the first thing to suffer in times of intense political and economic concern like these.

Recent trading updates from other major sellers of expensive items have exacerbated the sense of concern too. Marshall Motor Holdings, for instance, announced in a pre-Christmas release that the market for automobiles has remained “challenging,” and that trading conditions had actually weakened further in the fourth quarter.

And in an earlier update, furniture retailer ScS Group warned that its own like-for-like orders were down 7.1% during the 17 weeks to November 23, a result that it said reflected “ongoing economic and political uncertainties [that] are continuing to impact consumer confidence and spending.”

Too much risk!

AO World’s share price has carried on ballooning following better-than-expected results in mid-November, at which time its financials showed like-for-like electrical sales rising 4.5% in the six months to September. It now trades at a 60% premium to share price levels before the release, which I think is way too high.

Given the prospect that Brexit uncertainty will likely last through the whole of 2020 at the very least, a situation that would see shoppers keeping a tight rein on their spending, I fear that those hoping for a sustained recovery following that solid first fiscal half could very well end up disappointed.

I’m certainly not tempted to buy right now, AO World’s high forward P/E ratio of 69.9 times for the financial year to March 2021 — the period in which it’s expected to snap back into profit — giving me extra reason to fear a share price correction should the news flow indeed disappoint.

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Royston Wild has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.