Over the past year, the ASOS (LSE:ASC) share price has fallen by 40%. At 400p, it’s a far cry from its 52-week highs above 1,000p. There are valid reasons for the fall over the past year, but I feel there are several reasons why now could be a good time to buy.
The business has adapted
Since we came out of the pandemic, ASOS has been exposed to much tougher competition. It’s a sector that always operates on thin profit margins, so competition that puts pressure on this is going to be a problem.
The swing from a profit after tax of £128.4m in 2021 to the loss of £30.8m in 2022 is a testament to this. As a result, I completely understand why the share price has been underperforming.
However, the management team also recognised the issues and has been working hard to cut costs. The benefit of this was noted in the recent trading update. Year-to-date, the business has realised £200m worth of profit optimisation and cost savings.
This means that even though top-line revenue is down 14% for the reporting quarter through to the end of May, the business is back to a profit before tax.
I don’t think that investors have realised that the firm might now have the worst behind it. The stock is down 5% over the past month, indicating to me that smart investors could consider purchasing it now while it’s still cheap before everyone else catches on.
Mike Ashley is keen
I always think it’s a good sign that a stock is cheap when those with experience in the sector are buying. This is the case with Frasers Group, controlled by entrepreneur and serial acquirer Mike Ashley.
The first I heard that the company had a stake in the business was late last year. However, this amounted to 5% of ASOS, so nothing drastic. Yet these purchases have accelerated in recent months, likely due to the share price movements.
At the start of this month, further share purchases by Frasers Group took its ASOS shareholding up to 19.8%! This shows the extent of buying that has been going on so far this year.
Ashley clearly thinks the stock is cheap at the moment, reflected in his actions. At the current price of 400p, I’d agree with him.
Don’t ignore the trend
Despite the above reasons, investors do need to be careful with ASOS shares. There were likely good reasons for thinking the stock was cheap at 600p or even 500p. Yet it kept falling. There’s nothing to say that the move lower won’t continue to 300p.
Therefore, a smart way to play this could be to invest in chunks over a period of several months. This limits the risk of trying to perfectly time the market in one go.
