As evidence that taking on more risk can sometimes lead to barnstorming returns over very short periods of time, ASOS (LSE: ASC) shares are up a mighty 65% in just one month.
Today, I’m looking at why this has happened and whether there could be more to come.
Why have ASOS shares done so well?
Put simply, things don’t seem to be quite as bad as the market was expecting.
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Yes, a 3% fall in revenue in the last four months of 2023 wasn’t ideal. However, investors were heartened by talk of good progress being made in overhauling the business plan.
A bullish call by Bank of America hasn’t done any harm either. It thinks fashion retailers now boast “undemanding” valuations as a result of companies like ASOS focusing on reducing costs and shoring up their balance sheets.
Another, albeit related, reason for ASOS shares rebounding strongly is the number of traders shorting the stock — those betting that its price will continue falling — has reduced. In reality, this involves buying shares back to close their positions, giving the stock an additional boost.
More gains ahead?
As someone with a (small) holding, I’ve welcomed the recent performance with open arms.
The issue that now arises is whether this form can continue.
I think there are still reasons to be cautious here.
For one, the superb performance of ASOS shares in such a short period of time will surely push some to take a profit and move on. After all, half-year numbers aren’t due until April. A lack of news can be as negative for share prices as bad news.
Another thing making me cautious is that the economic landscape hasn’t radically shifted in just a month since the beginning of 2023. So, ASOS could do all the right things from here and still be impacted by weaker consumer confidence (if that’s possible) and a protracted recession. Problematically, this is not a stock that generates dividends either. So, I won’t be paid to wait.
Oh, and those short-sellers? Yes, they’re still about (perhaps for the reasons mentioned above). As I type, ASOS remains the most ‘hated’ stock in the UK market.
All the right moves
On the other hand, it does feel like the new management team is finally beginning to address some key problems.
CEO José Antonio Ramos Calamonte is using all the right buzzwords and phrases. Reassuring talk of a “disciplined approach to capital allocation” and taking steps “to simplify the business” is just what I want to hear.
Despite expecting to make a loss in the first half of FY23, ASOS also forecast that existing headwinds would be “more than offset by accelerating benefits from [the] Driving change agenda” in the second half.
More than offset? That sounds pretty confident to me. A very low PEG ratio also catches the eye.
So, will I buy more?
On reflection, I’m not inclined to sell my ASOS shares yet. Indeed, I may well add to my holding if/when funds become available.
However, I’m not about to assume that such a massive gain in only a few weeks will happen again in February.
So, remaining diversified in other stocks is just as, if not more, important to me than ever.
