James Gard: Making its first appearance as stock of the week is online fashion retailer ASOS. After the latest quarterly FTSE reshuffle, the company has been shunted out of the FTSE 250. This follows a 35% fall in the share price in the year to date and a drop of 77% since this time last year. These sort of moves naturally attract short sellers, and it’s no surprise that ASOS is the most shorted stock in the FTSE. This sort of activity tends to heighten volatility in the short term, as my recent article on the subject shows. ASOS was one of those stocks that had an amazing pandemic but has crashed back to earth since. The reasons why are obvious: those with money still to spend are preferring shops like Primark, and those without have stopped splurge spending on clothes.
A disappointing set of half-year results in May reinforced the bear case for the retailer. Cash flow was a key concern, and to that end ASOS has just raised £75 million to shore up the balance sheet. Investors are fretting that this will not be enough. The company is promising a better second half. While Morningstar analysts expect to lower their fair estimate in the coming weeks, the shares are still one of the most undervalued among companies we rate in Europe.
They trade at £3.40 but are estimated at £33.60. Is there a bull case? From a shares point of view, volatility is nothing new – with big spikes in 2014, 2018 and 2021 followed by big falls. Morningstar’s Jelena Sokolova says that using data on its 26 million customers will lead to competitive advantages in the future. Its “brand reach” is strong in its home market of the UK and it has scope for further expansion in Europe and the US. These are tough markets to compete in but it can grow market share from a low base. Can ASOS come back into fashion? A lot depends on how it gets its house in order this year.
For Morningstar, I’m James Gard.
