ASOS (LON:ASC) has been a stock market phenomenon. While the internet fashion retailer has continued its impressive growth, both domestically and internationally, even more impressive has been the expansion of its P/E ratio which has now reached the nosebleed territory of 100 times 2010 earnings of 18.7p per share to give the company a market capitalisation of £1.4bn.
The company floated back in 2001 and first hit most investors radar with a tip at 5p by the renowned city maven Mark Watson Mitchell, but while ASOS has been clearly blessed by the market ever since one does start to wonder where the value lies for buyers at this level.
What has been startling in the case of ASOS has been its continued rise in spite of a very full valuation, and gives proof to the pudding that the market falls in love with its darlings. Institutional investors have long been enamoured with momentum trades and often feel compelled to window dress their portfolios with the most talked about companies resulting in continued buying of market stars regardless of valuation.
Studies by William O’Neil amp; Co , the institutional advisory run by the founder of Investors Business Daily, have shown that many of the stock market’s highest performers have risen regardless of valuation but primarily due to the momentum behind current and historic profit potential. Value investors would scoff at such a notion, but clearly, given the right market environment these ideas have merit.
So how do you find the next ASOS, the next company whose market return could be driven as much by P/E expansion as by profit growth? The aforesaid Bill O’Neil’s book for retail investors quot;How to Make Money in Stocksquot; is a classic text for momentum investors who want to balance technical and fundamental analysis which provides good screen ideas for precisely this purpose. He espouses the ‘CAN SLIM’ approach to stock picking, an mnemonic that summarises an approach that focuses on market leaders with earnings momentum that have ‘something new’ to grab the attention of institutional sponsors – much as ASOS has in the previous 12 months.
Bearing these ideas in mind, it was interesting to note several sets of eye catching results last week from 3 companies of different sizes that while priced expensively today may offer investors exposure to some of these ideas. Two of the companies highlighted lie around the £100m mcap mark and one is much larger at £700m. Often institutional investors can’t buy companies with capitalisations of less than £100m due to the liquidity constraints and research by Goldman Sachs amongst others in various sectors has shown that the £100m to £1bn segment of the market can be the area to find the most outperformance – backing up the words of Jim Slater that ‘Elephants don’t Gallop’.
Advanced Medical Solutions Group
Advanced Medical Solutions (LON:AMS) is aiming to position itself as a global medical technology company and offers a variety of branded products to the healthcare industry around the theme of non invasive Wound Care and Wound Closure. The company’s major brands are ActivHeal, a range of dressings promoting moist wound healing, and LiquiBand, wound closure and sealant products. Liquiband is effectively a form of adhesive, providing surgeons and Aamp;E departments with an alternative to traditional stitches. With the completion of its new ‘world class’ facility at Winsford the company believes it is now ‘well positioned to support substantial growth’, and as the company is moving strongly into the US (2010 US growth + 55%) with its sales drive these facilities are going to be dearly needed.
Last week, AMS reported sales growth in 2010 of 32% and pre-exceptional earnings per share up 24%. At a market cap of £124m the company trades on a p/e multiple of 24 times falling to 18 times on broker’s expected earnings growth of 35%. Seven Brokers follow the company.
Cupid (LON:CUP) is to my knowledge the UKs only listed online dating company and came to the AIM market in June last year. The company raised £10m at its float and proceeded to quickly make three acquisitions that have all started making an immediate impact. The company’s strategy is to use social media, facebook and mobile handset applications, to drive its business which is becoming increasingly global as it moves into new markets.
The company now has 13 million registrants across 29 countries and 7.3m monthly active users on its Facebook Apps. In its latest report stated that ‘any stigma surrounding online dating is gone’ with ‘one in 5 relationships’ now started online and the question for Cupid is whether they can build enough of a moat around their core and acquired brands to build a long term economic moat. The company has £6m in cash and is looking for further international acquisitions.
Last week, CUP reported sales growth of 202% and EBITDA growth of 367%. While these numbers are clearly driven through acquisition it should be noted that the full contribution from these acquisitions was only felt late in the year. Full year results showed a 15% contribution from international sales, which the company expects to rise to 50% in 2011. Similarly to AMS, the company trades on a multiple of 24 times current earnings at a market capitalisation of just under £100m and consensus estimates from the three brokers following the company put the company on a 12 month multiple of 14.5 times.
Many growth investors will be extremely familiar with Abcam (LON:ABC) , which has been billed the ‘Amazon of Antibodies’. The company literally does just that, distributing over 60,000 antibodies to scientist’s research labs globally through its websites. Echoing the approach taken by the book selling behemoth, Abcam encourages community reviews on its website building up loyalty amongst buyers and enjoying the benefit of a network effect.
The company has become something of a cash cow, generating so much free cashflow that it now boasts £40m cash on its balance sheet and no debt and while it could afford a much higher dividend it is choosing to keep the cash close to hand as a warchest. Growth has historically been organic but CEO Jonathan Milner has hinted that they could do an acquisition if the right one came available.
With an exceptional operating history Abcam has become a £700m cap market favourite having risen almost 900% since its 2005 float on a very full p/e of 32 times current rolling earnings per share. The company reported interim results last week showing eps of 6.17p up 32% year on year and the 10 brokers following the company are forecasting a consensus full year earnings of 12.5p.
As described, all three of these companies are priced at a significant premium to the market due to the fact that they offer growth opportunities that leverage the distribution channel of the internet or the disruptive nature of new technologies. While high growth rates and high valuations increase the risk for investors to the downside should the anticipated growth fail they also offer the possibility of higher share price returns should the growth come through. In ASOS’s case the market has decided to bid the valuation up to such an extreme level that it is now attracting the interest of short sellers – while cases of extreme multiple expansion such as ASOS are a rarity, they do highlight the potential rewards for investors should they pick the market darlings of tomorrow.
Where do you see the next ASOS on the UK market? Let us know in the comment box below.
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