ASOS makes me look like an ass…
Posted on April 27, 2009 by Richard Beddard
Filed Under Companies, Investing, Markets |
‘A’ is for acronym, and anomaly
Here’s a rarity these days, a couple of charts that go from bottom left to top right:
Yesterday, ASOS (ASC) announced it had doubled sales and and almost doubled of pre-tax profit and is looking ahead to another year of strong growth.
I cringe whenever I look at charts like ASOS, and Abcam (ABC). Both are online retailers, in very different markets. ASOS sells fashionable clothes to young people, mostly, and Abcam sells antibodies to scientists. Both appeared to be excellent businesses when I looked at them (See iBall, November 2007, and this blog in January 2008), but the problem was (and is) that their excellence is fully appreciated by the stockmarket. ASOS‘ one-year historic PE is 53 and Abcam’s is 35.
Despite the obvious attractions of growing, profitable, financially strong businesses, the shares are grossly expensive if their current level of profits are typical. The earnings yield, or theoretical return, on a company with a PE of 50, is just 2%. So there’s no value in the two A’s now. Shareholders expect the value to come through vastly increased profits in the future.
For these companies to be good investments now, they not only have to continue growing very rapidly, they have to do even better than investors think. Since the future is very uncertain and investors already expect great things, I think the odds are against this kind of speculation.
I said the same thing over a year ago. Since then Abcam’s price has gone up from 340p to 640p and ASOS has risen from 170p to 365p. Ultimately most growth shares fall short of stockmarket expectations, but these two have been exceptions that prove the rule.
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Monday’s data day
Last week the stockmarket finished with a flourish, but in valuation terms, it’s still on a long-term price earnings ratio of ten (i.e. cheap, see my comment last week for an explanation):
Since the average is ten, there are plenty of companies that are even cheaper. This is a list of companies that may not only be cheap, but financially strong. Their assets, what they own, are more than twice the value of their liabilities, or what they owe. They’ve also reported recently.
A word of caution, though. While investing in a broad spread of thirty of these companies may be a profitable and safe strategy (I’ve dubbed it the Thrifty 30), individual companies may be very risky. I analyse each potential buy individually.
The data is from Sharelockholmes.com, the only stockmarket screener I know that includes these variables.
In theory:
The house-price-roller-coaster-economist-’spat’
Thomas Lawler, an economist, says Robert Shiller’s feted house price index showing house prices from 1890 to 2004 is “bogus” because it’s cobbled together from different sources. It makes a great roller-coaster ride, though.
Don’t read this unless you want to feel bad. Simon Johnson, former chief economist at the IMF, says the bankers are in cahoots with the politicians but the US won’t recover until the banks are nationalised and then broken up. See the problem?
Dr Keith Anderson, a finance lecturer at York University and inventor of the Naked PE would like smaller banks too, and he has a plan to make them smaller, or pay for the privilege of being too big to fail.
Nobel prize winning economist and Gordon Brown fan, Paul Krugman, is optimistic post Budget Britain, at least compared to Spain.
Betting successfully on horses is not about finding the race winner, says Patrick Veitch, professional punter and author of Enemy Number One, but finding the horses that are most underestimated.
The Big Picture notes that director buys and sells are useful market timing indicators according to Bob Bronson, an analyst, and now they’re selling in droves.
After all the hype, Nick Louth is surprised to find the corporate bond market is a wilderness for the private investor. Nevertheless, he hacks his way through and buys two bonds that look good value.
Of all Warren Buffett’s letters to shareholders, Wide Moat Investing, thinks the 1984 letter to shareholders best characterises his approach to understanding and valuing companies.
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13 Responses to “ASOS makes me look like an ass…”
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That paper by Simon Johnson is excellent. It strikes so many cords with my way of thinking!
In my opinon, the whole financial ‘solution’ is simply a massive and convoluted debt-swap between the banks and the tax payer. The gap between rich and poor will necessarily get wider because of this, and short of a revolution or a collapse in the dollar, the banks will get massively richer.
As an aside, am I the only person who reads the words ‘stimulate growth’ (which must be one of the most common phrases to appear in news papers over the last year) as ‘simulate growth’?
PS I know I spelt ‘chord’ wrong
Hi Robin, great to hear from you
To summarise and simplify and misquote Taleb, who thinks that regulators were part of the cause of the financial crisis and therefore can’t be the solution, the only bit of regulation (or one of the few pieces of regulation) that we should introduce is small banks.
It’s better to get the design of the system right than allow a faulty design and impose a myriad of regulations, form filling and bureaucracy to try and control it.
It’s an appealing way of thinking.
As for the ‘financial solution’, I think of it is a way of transferring future wealth to now, when the prudent think to do would have been to have saved up a reserve of past wealth to see us through.
Well, although the banks and the government are jointly at the top of the pile of groups to blame for the current problems; the real culprit is globalisation itself. Globalisation has simply happened too quickly. Hopefully people will be able to realign their global interests before the world has the long foretold environmental disaster.
An interesting effect of globalisation is the concept of ‘private equity’. My comments below are inspired by the excellent book ‘Who Runs Britain’ by Robert Preston.
Private equity professes to be a good thing because it makes businesses more efficient. However in actual fact it means that:
1) more people lose their jobs
2) people get paid less
3) good businesses get dangerously over-burdened with debt
4) the government gets less tax from the business as it is so much more efficient and employs fewer people
5) the new owners get all the reward and the majority workers ( who do all the real work) take on all the risk
6) the new owners pay no income tax
However, due to globalisation, what has happened is even worse because the actual debt is raised in a different country from Britain. This means that the tax raised from the debt goes to a foreign government (usually the US). However the liabilities of the debt are applied to the country where the business is based (e.g. the UK). Therefore you get the ridiculous situation where a company might pay £40m in tax revenue before being taken over by private equity to a situation where the British government actually has to pay back £15m in tax due to the debt liabilities of the company.
I shall have to take a look at Robert Peston’s book, though it gets mixed reviews on Amazon. On private equity, at the risk of oversimplifying again, there’s good private equity and bad private equity. I wrote about this in one of my first blogs: http://blog.iii.co.uk/the-truth-about-private-equity/
Hi Richard,
I do tend to look at things in a blank & white (or fair and unfair) fashion as you can probably tell from my other posts
Your ‘private equity’ article is brilliant and absolutely hits the nail on the head. I am, of course talking about ‘buy-out’ private equity in my previous comments. Your article highlights all the bad things about this type of private equity and simply reaffirms my viewpoint. It shows how some of the fake ‘simulated’ growth of cheap credit has materialised over the last 8 years. The quote in your article says it all about the loss of buy-out private equity.
“It would be a massive, massive blow to the UK economy. I’m guessing, but you could be talking about taking one or two percent off GDP”
All I can say is ‘good riddance’. Get all the financiers, lawyers, accountants and business consultants retrained as teachers (although it is debatable whether they would cause more or less long term damage in this role).
I am just a little sad that our pathetic government has done nothing to actually engineer a green recovery in their recent budget, and has simply opted for the easy, short term, American solution of simulated growth (not ‘stimulated’ growth).
Hopefully we call all start buying cheap Chinese cr-ap again soon.
The common denominator is financial engineering isn’t it. Whether we’re talking about banks leveraging up their balance sheets with CDOs or private equity hollowing out businesses with debt its the financial engineering (i.e. complex, unfathomable debt) that causes the problems. Banks and private equity, hedge funds, all these things aren’t evil, neither is debt even. It’s the use to which these things are being put. Kind of guns don’t kill, people do argument.
The learning point for financial investors is if you scent a whiff of financial engineering, leave it alone. Pubs and their securitised estates, companies with massive pension funds, most financial institutions, companies with large debts that might rely on those institutions - leave ‘em alone!
Even Buffett… http://www.bloomberg.com/apps/news?pid=20601109&sid=a_XX1k9rMDnQ&
Well Anthony Bolton says that we are about to enter a government driven bull market (sorry I meant bank driven bull market).
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aOi8RamsQ3TQ
As a contrarian I would say that we are about to take another leg down
I’ve just received his new book “Investing against the Tide”. Since he’s a contrarian, would that make you a double contrarian?
!!!
I appreciate the irony. However Bolton says that he is being contrarian by saying there will be a tax payer funded bull market, but I really do not get the feeling that this is being contrarian. This is exactly what the governments are trying to achieve as they feel that this will be the quick fix to paying down their astronomical debt.
However what bothers me is that nothing has fundamentally changed yet to drive a new bull market. Are the banks really going to allocate the tax payer capital in a way that does not serve their own self-interest more than the long term economic health?
I think facetiousness might be a better word
Intuitively I’m sceptical too of the bull market theory, although technically, having called it when it was all but apparent, Bolton’s already correct. If March was the bottom of a calamitous bear market, it didn’t feel like it (where was the revulsion?) and although shares were good value, where was the overreaction?
While his stock market calls have been a bit dubious, his stock picking record is excellent when you consider the disadvantages fund managers labour under
and the book is very interesting, so far. I’m going to blog something today on it.
No wonder Tesco.com now wants a piece of the action:
http://www.timacheson.com/Blog/2009/jul/asos.com_profits_double_despite_recession