This morning (5/6/2014) ASOS issued a trading statement before the market opened. It wasn’t all bad in that total retail sales at constant currencies rose by 33% in the last quarter – and there are not many businesses that are growing at that rate. However, EBIT margin guidance was reduced from circa 6.5% to 4.5% for the current financial year due to increased promotional activity and the relatively higher proportion of European sales. US and ROW sales growth was perhaps seen as disappointing being particularly hit by the strength of sterling.
The share price promptly collapsed. The last few trades the previous day were done at about 4530p. This morning the first trades were reported at 2770p and it subsequently fell further giving a fall of over 40%. In other words, with large numbers of small trades going through it looked like a typical panic where investors wanted out at any price.
The last time I commented on this company was in September 2013 when the share price was 5110, so it had already fallen back substantially from that level before today. I questioned the fundamental valuation and said “It certainly looks as though buyers have been driving the stock price up not on any fundamental valuation but on speculating on what others might pay for the shares, i.e. it’s the typical ‘tulip’ bubble when stock is in short supply“.
If there is nothing supporting the underlying valuation then share prices can collapse in this way before investors can exit. Now one can argue about how the fundamental value of early stage companies can be calculated – albeit that this was one with a history of profits. But investors who have simply been speculating in these shares should not complain if they have been caught out. You can never get out fast enough from such stocks when they trip up.
Roger Lawson
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