To recap, it has not been a good few weeks for the online fashion retailer. First came two profit warnings that have wiped two-thirds off the value of its shares over the last six months; then followed a fire at its gigantic warehouse in Barnsley which saw its website shut for two days and damaged £20m of stock.
The first lesson is that it is important to diversify to avoid such stock specific risks, especially if your investment horizon is short term or capital preservation is important to you. Because bad things can and do happen to good companies, and even if Asos, for example, does bounce back, it won’t happen overnight.
Bounce back I’m sure it will, though. As many of you will no doubt remember it’s not the first time that such bad luck has befallen the company; the first disaster came in 2005 when the Buncefield oil explosion destroyed a big chunk of Asos' stock in the adjacent warehouse. At that point Asos was a mere stripling of a company, and such an event could have been terminal.
I have always been impressed by its subsequent recovery, the results, I believe, of the determination within its management to succeed - and all the more impressive since most of the world agreed that trying to sell clothes online was a hiding to nothing. This is why I maintain that management matters, especially when the going gets tough. No company enjoys a trouble free life, but what is important is their ability to cope with difficult events. And a temporary setback can present a great buying opportunity when good bosses who look way beyond any normal horizon are at the helm.
Of course, a share price fall alone does not mean the shares are necessarily cheap, at least, not in the way that an ardent value investor would demand. After recent falls Asos shares trade still on a forecast PE ratio of 70; even when they dipped to below £15 after a series of disappointing updates in 2011 the forward rating was still in the forties. High ratings, after all, mean shares are hit especially hard when growth seems to lag.
Yet sometimes mere metrics do not reflect the potential, especially if ratings are high because profits are being ploughed back into expansion. If that investment opens up a huge market in China, for instance, today’s rating becomes an irrelevance - but today we can only guess at how big Asos could become, just as we could only guess in 1999 how a certain online bookshop would live up to its stellar rating. Amazon’s shares have, of course, climbed 300 per cent since then, growth that, if you’d focused only on value-based fundamentals, you’d have missed out on entirely.
