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Down 70% but rising, are ASOS shares a no-brainer buy?

Young female couple boarding their plane at the airport to go on holiday.
Image source: Getty Images

ASOS (LSE: ASC) shares have fallen 73% over the past 12 months as inflation bites.

But the stock is actually up 35% since its low point in October. Is the market starting to see ASOS as an oversold buy now?

Full-year results were released in October, which perhaps helped trigger the share price uprating. Considering the economic mess we’re in, I think the numbers were decent in the circumstances.

Christmas boost?

With Christmas almost upon us, investors are presumably hoping for a healthy festive shopping season. A trading update covering the period is scheduled for 12 January, so we won’t have long to wait.

Estimates suggest we’ll see a general decline of around 3% in Christmas spending this year, compared to 2021. And that might seem like cause for gloom. But it’s nowhere near as bad as I was expecting. And more people are planning to go away this year, so maybe they’ll want new clothes for the holiday?

The relatively modest predicted spending dip makes me think retail shares might be good buys for 2023. And I’m optimistic about an ASOS recovery.

Valuation

It’s tricky trying to put a valuation on ASOS shares. Analysts expect the company to record a loss for the year to August 2023. It should be significantly improved on the year just ended though. And they have profits back on the cards for 2023-24 and beyond.

Forecasts would drop the price-to-earnings (P/E) ratio to around 7.5 by the 2024-25 year. Considering ASOS shares were on a multiple of over 80 just before the pandemic, that’s an astonishing fall.

The shares have clearly been overvalued several times in their history. And I really don’t think investors will be so badly bitten by the bug again. But I do still see attractive long-tern growth potential. And that forecast P/E just makes ASOS look too cheap to me.

Forecast caution

There is one key note of caution though. Forecasts are often wrong. And the further out, the more wrong they often are. And some analysts have downgraded their outlook in the past couple of months as we entered recession.

So I won’t place much confidence on the accuracy of forecasts right now. But I do see them as a general sign of positive market sentiment towards ASOS.

Another issue concerns me. Chief financial officer (CFO) Mat Dunn stepped down at the end of October. And we’ve just learned that interim CFO Katy Mecklenburgh is to depart in six months’ time. I get a bit twitchy when a company’s CFO succession looks like it might be problematic.

New start?

But it’s been a year of board changes. José Antonio Ramos Calamonte took on the chief executive role in June, from his previous position as chief commercial officer. And he appears to be keen to shake things up.

So, we have a new CEO and hopefully soon a new CFO, and we’re heading into a new year. Will 2023 bring renewed hope for ASOS investors? I wouldn’t quite label ASOS a no-brainer investment right now, not with today’s risks.

But I do want to see those Christmas trading figures.

The post Down 70% but rising, are ASOS shares a no-brainer buy? appeared first on The Motley Fool UK.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended Asos Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2022