ASOS surge looks ripe for selling

<p>ASOS shares show little trace today (28th August) of the fizzy speculation that propelled them more than 19% higher Wednesday. As often happens in the […]</p>

ASOS shares show little trace today (28th August) of the fizzy speculation that propelled them more than 19% higher Wednesday.

As often happens in the UK summer holiday months, fallow news and a relative slump in share-trading volume can give rise to speculation of varying credibility.

In this case, shares of the UK online retailer were snapped-up by traders speculating on market talk of cash bid from a US firm, said to be worth about £50 per share.

According to the talk, which was later conveyed in news reports, the US buyer may even have approached the owner of a 27.4% stake in ASOS, Denmark-based Bestseller A/S, a fashion business also holding a stake in German rival Zalando AG.

ASOS shares had lost almost two-thirds of their value year-on-year, by the beginning of this week, with the company having been slammed by a number of misfortunes, including a warehouse fire and profit warnings.

The stock hit a high of 7195p at the end of February this year having been floated on the stock market in 2001 at 20p.

Giant US online retailers, interested in ASOS?

Companies that might be interested in ASOS, according to online news reports, are e-commerce giants eBay and Amazon. Both are understood to have made strategic calculations pointing to an expansion into the fast-growing e-commerce area of fashion.

ASOS declined to comment on the talk.

Unfortunately for the speculators, the balance of probabilities seems to point to this week’s rumours holding little water.

For one thing, the talk implied a bid for ASOS worth well over £2.5bn, implying a ratio of 3 times 2013 sales for the UK retailer.

Does this seem like a sound investment? Especially amid concerns in the market that ASOS’s run of profit warnings might not be exhausted, with the company having warned in June full-year profits would miss forecasts, wiping £1.2bn off the company’s market value in one day.

Additionally, a notable outstanding net short position in the stock, according to financial market data provider Markit, up till Wednesday, helps explain the size of yesterday’s move with traders very likely forced to exacerbate net buying in the name with their own short-covering share purchases.

Another market claim dispelled today is supposed interest in a merger between ASOS and Zalando.

Senior figures within Zalando accepted during an interview today the pair were fairly “complementary”, given the German company’s broader target market and ASOS’s focus on 20-somethings and the British market. But they dismissed speculation the two could one day merge.

Now, of course all the above factors do not definitively ‘prove’ ASOS won’t be taken over by a large company for a good premium.

It’s just that in the medium term, to me that looks unlikely.

It leaves this remarkably volatile stock at the mercy of speculators who have tended to treat it as a plaything of late.

Taking into account the low on 21st August at 2134p and the height of speculation at 2806.46p, I would put a first target for sellers around 2649p.

But the relative low volume market environment ought not to impede a deeper fall toward (and perhaps beyond) the 61.8% retracement of the surge which comes in at 2396.45p.

 

ASOS and Ocado as two sides of the same coin amid signs of increased online competition

There was a further twist in UK Internet retail stocks today.

It emerged following reports suggesting large retailers in Europe and North America may be ramping up online food retailing operations in order to compete with Amazon Inc.

Retail analysts reported earlier on Thursday there were indications major retailers may be prepared to effectively sacrifice grocery margins for the sake of maintaining customer loyalty, with the ultimate aim of establishing smoother, improved revenues overall.

The analysts at retail consultancy eNova Partnership note global online grocery spends is forecast to triple to $100bn by 2018.

The consultancy said compelling economics were possible by combining the very short delivery time frames achieved online by major UK grocery retailers, like Tesco Plc., with deliveries of higher-margin goods that Amazon specialises in.

This brings us back to Ocado, another UK darling of short sellers.

Having had its own frenzied upswing in late February followed by an equally pronounced collapse, traders are deciding if it may be due another turn.

In fact, a short trade placed in September last year on a basket of ASOS stock calculated to approximately match the value of a long trade in one Ocado share, would have created positive cash flow to date of about £1,757.

ASOS closed 1.3% lower today at 2775p whilst Ocado tumbled 15% to 339.3p.

 

Join our live webinars for the latest analysis and trading ideas. Register now

GAIN Capital UK Limited (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.

For further details see our full non-independent research disclaimer and quarterly summary.