When I covered ASOS (LSE: ASC) shares last July, the stock was out of favour because the online fashion retail giant had just issued a profit warning. At the time, I said the risk/reward proposition was “attractive” due to the fact that ASOS’s share price had tanked but the group’s problems looked short-term in nature.
Fast forward to today, and ASOS shares are now around 50% higher than they were at the time of my July article as the group has recovered from its setback. That’s a great result for those who were brave enough to go against the herd and look past the company’s short-term problems.
Examining the investment case for ASOS, however, I believe the stock has the potential to keep rising. Here are three reasons (the third is particularly interesting) I’d buy its shares today.
ASOS has its mojo back
The first reason I like the look of ASOS shares right now is that the company has its mojo back. Not only did the group issue a solid set of full-year results in October, but it also issued a trading statement on 23 January that showed it had a fantastic end to 2019.
Indeed, for the four months to 31 December, group revenue surged 20% to £1,106m, which is an excellent result when you consider that many UK retailers are struggling right now. Other highlights included:
-
A 20% increase in total orders
-
A 23% increase in customer visits
-
A record Black Friday
CEO Nick Beighton also said: “We remain confident in our ability to capture the substantial opportunity ahead of us.”
Earnings and price target upgrades
I also like the fact analysts have been upgrading their earnings per share (EPS) forecasts recently. According to Stockopedia, in the last month, the consensus forecast for FY2020 EPS has risen by 1.04p, while the consensus forecast for FY2021 EPS has lifted 3.16p. Earnings upgrades tend to be good for a company’s share price.
It’s also worth noting analysts at Credit Suisse have raised their price target for the stock not once, but twice over the last month. On 17 January, the broker upped its target price to 4,000p from 3,650p. Then, on 24 January, it raised its target price to 4,100p from 4,000p. Again, this is likely to help the share price. I’ll point out the broker’s current price target is 25% higher than the current share price.
CEO purchase
Finally, another reason I’m bullish on ASOS shares right now is that Beighton has just purchased more shares in the company. On 29 January, the CEO acquired another 1,629 shares at a price of 3,060p, spending roughly £50K on stock.
The last time Beighton purchased stock, the shares rose from around 2,100p to near 3,700p in just a few months. His insight into the company’s future prospects was clearly better than analysts. So I see this latest purchase as a bullish signal.
The final word
I’ll point out that ASOS shares remain expensive. Currently, the forward-looking P/E ratio is about 59 (falling to 38 using the FY2021 EPS forecast). This means the stock could fall sharply if growth stalls.
Overall, however, I think the investment case is attractive. Given that Beighton is buying, I think now is a good time to be building a position in the stock.
