Hunting for the next ASOS - three stocks to watch

Monday, Mar 14 2011 by
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Hunting for the next ASOS  three stocks to watch

ASOS (LON:ASC) has been a stock market phenomenon. While the internet fashion retailer has continued its impressive growth, both domestically and internationally, even more impressive has been the expansion of its P/E ratio which has now reached the nosebleed territory of 100 times 2010 earnings of 18.7p per share to give the company a market capitalisation of £1.4bn. The company floated back in 2001 and first hit most investors radar with a tip at 5p by the renowned city maven Mark Watson Mitchell, but while ASOS has been clearly blessed by the market ever since one does start to wonder where the value lies for buyers at this level.

What has been startling in the case of ASOS has been its continued rise in spite of a very full valuation, and gives proof to the pudding that the market falls in love with its darlings. Institutional investors have long been enamoured with momentum trades and often feel compelled to window dress their portfolios with the most talked about companies resulting in continued buying of market stars regardless of valuation. Studies by William O'Neil & Co  , the institutional advisory run by the founder of Investors Business Daily, have shown that many of the stock market's highest performers have risen regardless of valuation but primarily due to the momentum behind current and historic profit potential. Value investors would scoff at such a notion, but clearly, given the right market environment these ideas have merit.

So how do you find the next ASOS, the next company whose market return could be driven as much by P/E expansion as by profit growth? The aforesaid Bill O'Neil's book for retail investors "How to Make Money in Stocks" is a classic text for momentum investors who want to balance technical and fundamental analysis which provides good screen ideas for precisely this purpose. He espouses the 'CAN SLIM' approach to stock picking, an mnemonic that summarises an approach that focuses on market leaders with earnings momentum that have 'something new' to grab the attention of institutional sponsors - much as ASOS has in the previous 12 months.

Bearing these ideas in mind, it was interesting to note several sets of eye catching results last week from 3 companies of different sizes that while priced expensively today may offer investors exposure to some of these ideas. Two of the companies highlighted lie around the £100m mcap mark and one is much larger at £700m. Often institutional investors can't buy companies with capitalisations of less than £100m due to the liquidity constraints and research by Goldman Sachs amongst others in various sectors has shown that the £100m to £1bn segment of the market can be the area to find the most outperformance - backing up the words of Jim Slater that 'Elephants don't Gallop'.  

 

Advanced Medical Solutions Group

Advanced Medical Solutions (LON:AMS) is aiming to position itself as a global medical technology company and offers a variety of branded products to the healthcare industry around the theme of non invasive Wound Care and Wound Closure. The company's major brands are ActivHeal, a range of dressings promoting moist wound healing, and LiquiBand, wound closure and sealant products. Liquiband is effectively a form of adhesive, providing surgeons and A&E departments with an alternative to traditional stitches. With the completion of its new 'world class' facility at Winsford the company believes it is now 'well positioned to support substantial growth', and as the company is moving strongly into the US (2010 US growth + 55%) with its sales drive these facilities are going to be dearly needed.

Last week, AMS reported sales growth in 2010 of 32% and pre-exceptional earnings per share up 24%. At a market cap of £124m the company trades on a p/e multiple of 24 times falling to 18 times on broker's expected earnings growth of 35%. Seven Brokers follow the company.

 

Cupid PLC

Cupid (LON:CUP)  is to my knowledge the UKs only listed online dating company and came to the AIM market in June last year. The company raised £10m at its float and proceeded to quickly make three acquisitions that have all started making an immediate impact. The company's strategy is to use social media, facebook and mobile handset applications, to drive its business which is becoming increasingly global as it moves into new markets. The company now has 13 million registrants across 29 countries and 7.3m monthly active users on its Facebook Apps. In its latest report stated that 'any stigma surrounding online dating is gone' with 'one in 5 relationships' now started online and the question for Cupid is whether they can build enough of a moat around their core and acquired brands to build a long term economic moat. The company has £6m in cash and is looking for further international acquisitions. 

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Last week, CUP reported sales growth of 202% and EBITDA growth of 367%. While these numbers are clearly driven through acquisition it should be noted that the full contribution from these acquisitions was only felt late in the year. Full year results showed a 15% contribution from international sales, which the company expects to rise to 50% in 2011.   Similarly to AMS, the company trades on a multiple of 24 times current earnings at a market capitalisation of just under £100m and consensus estimates from the three brokers following the company put the company on a 12 month multiple of 14.5 times. 

 

Abcam

Many growth investors will be extremely familiar with Abcam (LON:ABC) , which has been billed the 'Amazon of Antibodies'. The company literally does just that, distributing over 60,000 antibodies to scientist's research labs globally through its websites. Echoing the approach taken by the book selling behemoth, Abcam encourages community reviews on its website building up loyalty amongst buyers and enjoying the benefit of a network effect. The company has become something of a cash cow, generating so much free cashflow that it now boasts £40m cash on its balance sheet and no debt and while it could afford a much higher dividend it is choosing to keep the cash close to hand as a  warchest.   Growth has historically been organic but CEO Jonathan Milner has hinted that they could do an acquisition if the right one came available.

With an exceptional operating history Abcam has become a £700m cap market favourite having risen almost 900% since its 2005 float on a very full p/e of 32 times current rolling earnings per share.  The company reported interim results last week showing eps of 6.17p up 32% year on year and the ten brokers following the company are forecasting a consensus full year earnings of 12.5p.

 

As described, all three of these companies are priced at a significant premium to the market due to the fact that they offer growth opportunities that leverage the distribution channel of the internet or the disruptive nature of new technologies. While high growth rates and high valuations increase the risk for investors to the downside should the anticipated growth fail they also offer the possibility of higher share price returns should the growth come through. In ASOS's case the market has decided to bid the valuation up to such an extreme level that it is now attracting the interest of short sellers - while cases of extreme multiple expansion such as ASOS are a rarity, they do highlight the potential rewards for investors should they pick the market darlings of tomorrow.

Where do you see the next ASOS on the UK market?  Let us know in the comment box below.

 


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ASOS Plc is a holding company. The principal activity of its subsidiary is Internet retailing. The Company’s geographical business segments include United Kingdom, United States, European Union and Rest of World. The Company offers a wide variety of fashion-related content. The Company sells over 65,000 branded and own-brand products through localized mobile and Web experiences. The Company’s products include its own brand plus around 800 brands ranging from big names to up-and-coming designers. Each week up to 2,500 new styles go live, whilst ASOS Marketplace offers a further 145,000 products. more »

Share Price (AIM)
2653p
Change
128.0  5.1%
P/E (fwd)
57.6
Yield (fwd)
n/a
Mkt Cap (£m)
2,106

Abcam plc is a producer and distributor of research-grade antibodies and associated protein research products, which are essential tools for life scientists, enabling them to analyse components of living cells at the molecular level. The Company develops and manufactures its own products, as well as externally sourcing products. The Company’s product includes Primary antibodies, including RabMAbs (rabbit monoclonal antibodies), Secondary antibodies, Functional assays, ELISA and other kits, Biochemicals, Proteins and peptides and Lysates. The Company’s subsidiaries include Abcam Inc, Abcam KK, Abcam (Hong Kong) Limited, Abcam Employee Share Benefit Trust Limited, Abcam Epitomics Holdings, Inc, Abcam US Group Holdings Inc, Abcam LLC and Abcam (US) Limited. more »

Share Price (AIM)
398.5p
Change
6.5  1.7%
P/E (fwd)
20.1
Yield (fwd)
2.2
Mkt Cap (£m)
786

Advanced Medical Solutions Group plc is engaged in the design, development, manufacture and distribution of novel high performance polymers, both natural and synthetic, for use in advanced woundcare dressings and of medical adhesives for closing and sealing tissue. The Company operates in four segments: Branded Direct, engaged in the selling, marketing and innovation of the Group’s branded products by the Group’s sales teams; Branded Distributed, engaged in the distribution, marketing and innovation of the Group’s brands sold by distributors in markets not serviced by the Company’s sales teams; OEM, engaged in selling and innovation of products supplied to the Company’s global and national partners and Bulk Materials, engaged in selling, marketing and innovation of bulk materials to medical device partners and convertors. more »

Share Price (AIM)
118.63p
Change
2.0  1.7%
P/E (fwd)
18.3
Yield (fwd)
0.7
Mkt Cap (£m)
243.1



  Is ASOS fundamentally strong or weak? Find out More »


5 Comments on this Article show/hide all

Monty9 27th Mar '11 1 of 5
6

How about DDD or OCG for dramatic capital growth over the next five years.  Both could wither but, with a following wind, they could be massibely successful.  Rather than using a new technology to turbocharge results they offer their own, but, having a licensing to partners business model, there are few capital constraints.

DDD Group plc (DDD) - Mcap £41M do software for 3D screens.  Samsung use their technology for their 3D TVs and other devices - one assumes phones and PCs.  There other major electronic firms who have licensed their technology also.  I have just seen the Nintendo DS 3D (ask your kids if you don't know) and I am now a 3D believer at least for games.  The DS 3D doesn't even need special glasses although the larger area screens do.  I think I am right in saying they have the IP in computer code that creates the 3D image from 2D video in real time.  I was sceptical of the need for a colour PC screen around 1990 so can't pretend to know how widely this  technology will be used; but if it goes well this tiny company could throw up a mega performance.

http://www.edisoninvestmentresearch.co.uk/research/company/DDD-Group 

Oxford Catalysts Group plc (OCG)  - Mcap £88M have spent 15 years and £250M developing applications for calalysts - some form of alchemy I understand - check out their web site for a funky oven cleaner demo.  They have recently announced their first commercial (albeit modest) order that transforms Gas to Liquid fuel (GTF) or waste to Liquid fuel (XTF).  They can deliver relatively tiny devices that most commercial operators cannot and match or better the current industry efficiency.  They have won awards for the technology and have a long list of patents.  A third of their 80 staff has a PhD!  The market opportunity is truly massive

http://www.edisoninvestmentresearch.co.uk/research/company/Oxford-Catalysts

 

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Jakedog 13th May '11 2 of 5
2

Yoox! ???

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harryr 16th May '11 3 of 5
2

I have to say what you did not say was how tiny ASOS was at 5p in market cap terms.Well under £10M.?

I am on the look out for stocks that can rise 100 times , having done 4p to £9.50 and 2p to £1.50 , i know that its not that hard to do, given time.

The above took 13 years and 6 years.

Start with very, very low market caps.

Go for growth and hang on in their.

A few for your to look at.

Angle (LON:AGL) fits the bill, up to 5 companies on its books of which any one would do the trick.

Shares cost under 30p with a broker target of £1.20p.

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noellakin 31st May '11 4 of 5

Very interesting
I will follow Abcam

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swinghaggis 14th Mar '12 5 of 5

I think cupid will have a strong run from here as a stock overhang has been cleared which recently depressed the share price. I don't see the institutions selling so am looking for PE expansion on improving earnings. Is that what you said Ed?

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CEO at Stockopedia where I weave code, prose and investing strategies to help investors beat the stock markets. I've a background in the City and asset management but now am more interested in building great stock selection tools for the use of investors online.   Traditionally investors online have had very poor access to the best statistics, analytics and strategies for the stock market and our aim is to set that straight.  High Quality fundamental information has been prohibitively expensive in the past and often annoyingly dull. People these days don't just want to know the PE Ratio and look at a balance sheet. They expect a layer of interpretation over data, signal from noise and the ability to know at a glance whether a stock is worth investigating or not. All this is possible using great design and the insights gleaned from quantitative research.  Stockopedia is where we try to make it happen ! more »



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