Falling Stars - how to handle glamour shares that fall from grace

Tuesday, Nov 10 2015 by
Falling Stars  how to handle glamour shares that fall from grace

In the ten years to 2014, shares in online fashion retailer Asos soared from around 7p to £70 each. The stock became the stuff of folklore among those that had either made a fortune or missed the chance of making millions by selling out too early. Its relentless growth seduced investors and created blistering momentum that pushed it to a nosebleed valuation.

Despite concerns that Asos was priced far too highly, investors continued to buy into expectations that it could keep keep up the pace. So when it finally did start showing the signs of slowing down, the impact on the shares was dramatic. When the hopes of more spectacular growth were dashed, Asos found itself out of fashion.


In the taxonomy of stock market winners Asos had become a Falling Star. Its financial and business quality continued to hold much appeal, but in the absence of hope, the extremely stretched valuation didn’t reflect underlying fundamentals. When momentum declined, the stock lacked two of the main drivers of investment returns. As a result, it looked expensive and deteriorating. For some, it still looks expensive.

The profile of a Falling Star

Earlier in this series, Ed wrote about how focusing on high Quality, high Momentum shares regardless of price can open the door to finding the stock market’s High Flyers - a class of high priced, compounding, market beating shares. Falling Stars are what you get when the Momentum leg of High Flyers gets kicked away. When brokers begin cutting their forecasts and the companies miss earnings expectations then expensive, quality companies can look very vulnerable.  

Falling Stars might be good quality businesses suffering temporary declines - and they may bounce back. But is the opportunity cost of holding them in the hope of higher share prices too much to bear? And is the sudden decline in momentum, as seen in Asos's case, something that will become far more severe?

One of the highest profile cases of this kind of re-rating occurred with the so-called nifty fifty companies of the late 1960s (see the Research Affiliates note on this here). Back then, this group of 50 large, good quality blue chips like General Electric and Polaroid were rated at anything up to 100 times earnings. Researchers Vitali Kalesnik and Engin Kose describe these stocks as…

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As per our Terms of Use, Stockopedia is a financial news & data site, discussion forum and content aggregator. Our site should be used for educational & informational purposes only. We do not provide investment advice, recommendations or views as to whether an investment or strategy is suited to the investment needs of a specific individual. You should make your own decisions and seek independent professional advice before doing so. Remember: Shares can go down as well as up. Past performance is not a guide to future performance & investors may not get back the amount invested. ?>

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Asos PLC is a global fashion destination for a range of things. The Company sells and offers a range of fashion-related content on ASOS.com. The Company's segments include UK, US, EU and RoW. It sells over 85,000 branded and own-label products through localized mobile and Web experiences, delivering from its fulfilment centers in the United Kingdom, the United States, Europe and across the world. It offers approximately 75,000 separate clothing ranges, spanning women's wear and menswear, footwear and accessories, alongside its jewelry and beauty collections. The Company's collection of specialist own-label lines includes ASOS Curve, ASOS Maternity, ASOS Tall and ASOS Petite. The Company caters a range of customer segments and sizes, across all categories and price points. It also operates returns centers in Australia and Poland. It operates country-specific Websites in Australia, France, Germany, Italy, Spain, Russia and the Unites States. more »

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6 Comments on this Article show/hide all

bargainvalue 27th Nov '15 1 of 6

Very interesting findings. The momentum is very important and all fundamental focused investors should remember about this. I ve recently conducted an analysis of JD Sports Fashion (http://bargainvalue.co.uk/searching-for-the-pearls-jd-sports-fashion-jd/) . The company is great, but I wonder if it's not already overvalued. Of course, it is not a falling star yet, but I would like to hear your opinion in this matter.

Blog: Bargain Value
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herbie47 27th Nov '15 2 of 6

Interesting article but I disagree with some points. If you had bought ASOS at around £25 in September you could have made about 35% in a couple of months. Another share thats fallen even more than ASOS is Xaar (LON:XAR), that fell from 1162p to 222p but then recovered to over 550p. So if you bought near the bottom you would have made over 100%. Also your comment re Poundland I don't agree, after IPO it went up to over 400p and then drifted back down, its only recently its had problems, think because of an acquisition.

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marben100 7th Jun '17 3 of 6

Interesting to observe that since this article was published the share price of ASOS (LON:ASC) has almost doubled! So, the answer to the question "Is it worth the wait?", in the case of ASOS was an emphatic "yes".

Of course, ASOS may be the exception that proves the rule, but I'm not a great fan of rules of thumb and think that companies have to be analysed on case-by-case basis, unless you're running a mechanical portfolio.



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Ben Hobson 7th Jun '17 4 of 6

In reply to post #192074

Hi Mark!

Hindsight's a wonderful thing! I'm relaxed about the ASOS example because it shows how these stocks can move between styles.

Back in April 2014, ASOS would have just completed the shift from High Flyer (high quality and momentum) to Falling Star (high quality and low momentum). And from there it halved in four months. I can imagine that would have been uncomfortable for holders. As a potential buyer, you'd have had to have been very confident that it would eventually come good. Although I appreciate that with analysis it may have been possible.

It was two years (April 2016) until the StockRanks were pointing at ASOS being a High Flyer again. And since then it has done really well, as you say. So it wasn't like it was always a Falling Star - it made some very definite transitions between styles.

So would it have been better to hang on and wait? I'm not so sure. An alternative view is that there was ample time to sell it and wait for a recovery, if one came. Granted it was (and is) an extreme example - and I appreciate what you say about case-by-case analysis.

Cheers, Ben

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Edward Croft 7th Jun '17 5 of 6

In reply to post #192074

To be fair to Ben, he was using ASOS as an example of what happens after a stock becomes classified as a "Falling Star" - the two year slump from the 2014 peak once its momentum turned weak was illustrative.

At the time this article was written ASOS would have actually been classified as a "High Flyer" again with ranks of Quality: 94, Value: 9 & Momentum: 68 ... As with Boohoo, stocks moving from the Falling Star style back to High Flyer style it can be very positive.

Interestingly since March Domino's Pizza has become classified as a Falling Star. It will be interesting to see how it plays out.

PS - Mark - many thanks for the sponsorship ... Much appreciated !

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marben100 7th Jun '17 6 of 6

In reply to post #192209

Thanks Ed - no slight to Ben intended, the article is good. But, as I think you know, I'm very wary of purely mechanistic strategies. It would be really great to have those long-promised ;0) charts of stock rank histories, so that it's easier to spot when a trend may be turning. I really like the idea of the "Stockrank styles" - well done.

What prompted my comment was that I was rechecking the metrics on John Wood (LON:WG.) , because I'm (sort of!) playing some merger arb. on Amec Foster Wheeler (LON:AMFW) I notice that Wood is currently classified as a "falling star" but suspect that'll change within the next year or two, as the Wood/AMEC combo will, IMO, be a real global champion in its field, offering unparalleled engineering capabilities. Only time will tell, but contrarian calls on quality businesses going through rough patches have been pretty successful for me.

Good luck with your ride this Friday! Fantastic effort! Donating is the easy part: http://uk.virginmoneygiving.com/fundraiser-web/fundraiser/showFundraiserProfilePage.action?userUrl=edcroft


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