The stock plunged around 9 per cent on Tuesday following a downgrade from a major broker, and at one point was down almost 11 per cent for the day.
A number of major hedge fund managers are said to be interested in ASOS for their short portfolios, prompting fears that the FTSE AIM-listed stock – which has returned more than 1,000 per cent over a five-year period – is on the verge of a major correction.
Performance of stock and index over 5yrs
Source: FE Analytics
However, FE Alpha Manager Nimmo (pictured) continues to back the stock in his Standard Life UK Smaller Companies fund. It is currently his largest holding, with a 5 per cent weighting.
"My understanding is that a broker from Morgan Stanley has changed it from a 'buy' to a 'sell' because the valuation metric they are looking at makes it look overvalued," he said. "When you have got a trading statement or results for a quarter coming up, often investors take it as an excuse to take profits or to buy. Often there are big moves in either direction and then you tend to see things swing back after the results."
"In the last week, ASOS was up 10 per cent – if you look at it that way, [Tuesday’s] sell-off was just the stock giving that 10 per cent back."
"If there was an actual problem with the company, I think something would have been announced, but as long as I’m not missing something, nothing has changed."
Nimmo’s suspicions have already been proved right to some extent: ASOS beat expectations in its trading statement this morning, with a 47 per cent rise in its summer sales. The stock has rallied strongly on the news, up around 8 per cent today. It should be noted, however, that the UK market has opened higher this morning on the Fed’s decision not to taper quantitative easing last night, which has likely added to this gain.
The manager sees the company as a good long-term bet in spite of its elevated valuation – according to Bloomberg it is currently trading on a price/earnings (P/E) ratio of 128 times – and says he will not be fazed by future sell-offs based on worries over its price.
The manager acknowledges that its valuations will mean it is susceptible to sizeable sell-offs, but remains completely confident.
"I understand 10 per cent is a big number and I would say I’m a tad surprised it came off that much, but I just know it’s a winner for the long-term," he said.
"The market also came off quite a bit [on Tuesday] and this is a stock that has been popular with hedge fund managers. However, they’ve been badly caught out time and time again."
"For me, ASOS is the best online retailer in the world. It’s done something nothing else has done in the UK – it’s a business servicing the entire world, with more than two-thirds of revenue now coming from outside the UK."
"It’s a fast-moving, phenomenally impressive business. It is starting to attract US investors as well."
"Just because something becomes expensive, it doesn’t mean you should give up on it. It’s great to see a business doing so well, particularly one from the UK."
He explains that he has seen much bigger falls than 10 per cent in the last five years and so does not view the recent rough patch as anything new.
"I bought it back in 2006 when it was 85p and it was expensive even then," he said. "I’d agree it is at the top end of its valuation range, but I’m not concerned."
"Since I bought it, ASOS has halved twice – once when it went from £4 to £2 and once from £25 to about £12, so this isn’t something I’ve not seen before."
ASOS is currently priced at £52 a share. Since the beginning of 2006, the stock is up an incredible 6,904 per cent. Over the same period, the FTSE AIM index has lost 18.97 per cent and the FTSE All Share has returned 61.7 per cent.
Performance of stock and indices since Jan 2006
Source: FE Analytics
He thinks the company has the potential to become one of the UK’s leading firms.
"If you look at something like Inditex which owns Zara, which is not a dissimilar kind of business to ASOS, it has a market share of €68bn. I think ASOS has that kind of potential and at the moment it’s a £4bn business."
While Nimmo saw the fall on Tuesday as a buying opportunity and is likely to view future falls in the same way, he cannot increase his exposure because he already has 5 per cent of his fund invested in it.
"I never like to have more than 5 per cent in one single stock," he said. "I’ve sold three-quarters of everything I’ve had in ASOS since I first bought it and it’s still 5 per cent of the fund. I’ve sold £14m of stock just this year."
"I can’t really buy more unless it goes down an awful lot, but I don’t envisage that happening."
Nimmo uses a screening process at Standard Life to help him pick companies. Valuation is one of the key components of the screen, but factors such as earnings and price momentum, growth and defensibility, strength of balance sheet and cash-flow are also taken into account.
"ASOS is still a 'buy' taking all those things into account," the manager said.
"If earnings growth continues to rise, that counteracts the valuation. Of course, valuation is an important thing, but analysts tend to be very disciplined, verging on the inflexible, and it’s the same with their client base. For me, valuations aren’t everything, though I’m sure many would disagree."
He says obsessing over valuations is particularly important when investing in small and mid caps, because the risk of default is much higher.
He commented: "If you buy a portfolio of stocks on a low P/E, that doesn’t necessarily mean you’ll make money. If anything, the reverse is true when looking at the small cap market. I think you get what you pay for."
Standard Life UK Smaller Companies is one of 10 open-ended funds that hold ASOS in their top-10. Among its other big fans are Marlborough UK Leading Companies and Rathbone Global Opportunities.
Nimmo’s £1.21bn fund is one of the most highly rated in the IMA UK Smaller Companies sector. It has returned 336.62 per cent over the last decade, easily putting it in the top quartile of its sector.
Performance of fund and sector over 10yrs
Source: FE Analytics
Standard Life UK Smaller Companies is also top quartile over five years, but has lagged its rivals a touch during the rally of the last three years.
The fund is closed to new investors but is available on certain platforms. It has ongoing charges of 1.69 per cent.
Nimmo also runs a closed-ended equivalent of the fund – the Standard Life UK Smaller Companies IT. It is cheaper, with an OCF of 0.98 per cent, and also has a better record over one, three, five and 10 years.
