ASOS (LON:ASC) released a trading statement today showing robust increases in sales and active customers. Margins also improved. They didn’t mention profit figures, which seems to me to omitting some pretty basic information.
The Market seems to have disliked ASOS’s increased capital spending: “We have accelerated our investment in warehousing (both in the UK and Germany) and in IT, so that we will invest at least £68m in capital expenditure in the current year (previous guidance £55m.) ” This would seem bullish to me, especially as they add that “This investment will increase our sales capacity to c£2.5bn per annum, over £1bn higher than previous guidance.”
So what would normally be considered good is now considered bad. “Investment” is now being equated to “cost”.
There’s a few additional negatives in the statement: * some weaknesses in Rest of World * margins are likely to decline as the company expands into China * PBT is likely to be split 30:70 between H1 and H2 due to investment costs. Maybe the Market is worried that they’ll be slippages in H2.
Stockopedia reports a momentum score of 68, which is good, but not that good. RS6m is 30%, which should put it roughly in the top quintile. Pretty good.
So you’ve got some good momentum, but worryingly, a potential double-top formed, with he first top in early Jan, and the second in late Feb. The drop today puts the share price at below the 200dma, and into oversold territory.
Let’s be honest, though, the real reason that ASOS dropped is because it’s on a nose-bleed PE of 82. Such extreme valuation requires that the company keeps beating expectations.
Bears have been wrong consistently on this stock, so calling tops is difficult. It wouldn’t surprise me to learn that many momentum investors think that there’s no punch left in the bowl. That’s when you could see a real mess, especially if they switch positions from long to short. Value investors wont be even slightly interested in taking out a long position at these levels, so there’s a massive valuation gap to fill.
In all honesty, I don’t know if today’s drop represents a buying opportunity in a longer term momentum play, but that’s a risky play. My hunch is that the game’s over, and any rallies will later be revealed to be bull traps.
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