The Market, Renishaw and ASOS

We seem to be in one of those markets where investors are nervous because of a few big failures, some market commentators being bearish and the uncertainties caused by Brexit. While some of the “hot” stocks continue to power upwards, and the overall market trend in the UK is still positive, it only takes the slightest ripple to cause some stocks to fall sharply. That particularly applies to those where prices seemed to have got ahead of fundamentals.

Yesterday (25/1/2108) Renishaw (RSW) issued a trading statement. The figures were positive with adjusted earnings per share for the last 6 months to end December up by 75%. Forecasts for the full year were given as profit before tax to be between £127m to £147m which on my calculations matched the consensus forecasts of analysts for the full year. The share price promptly fell by 14.5% on the day.

Why the abrupt fall then? Well another announcement on the same day from the company contained the news that Sir David McMurtry, founder and Executive Chairman (age 77) was handing over the CEO role to William Lee (age 42). But Sir David is remaining as “Executive Chairman” with responsibility for “group innovation and product strategy”. No great change in reality then! Will Lee joined the company in 1996 so the culture is not going to change is it. Perhaps investors were disappointed that Sir David is not handing over more responsibilities with a view to retiring. Who knows?

Renishaw is in the business of selling metrology products and other high-tech engineering solutions such as additive manufacturing. It has a very global spread of revenue and is benefiting from the falling pound. But it was on prospective p/e of 34 for the current year before the price fall, which is now more like 30. Perhaps investors suddenly realised that the price was high, and succession issues remained.

I have been following the bad habit over the years of selling Renishaw when I thought the price was too high, and buying it back when it retreated. That’s probably cost me a lot of money in the long term. But as the price has now fallen back to well below when I last sold some shares, I bought them back today.

Another company with a trading statement yesterday was ASOS (ASC). This is not a company I currently hold but I have briefly in the past. ASOS reported group revenue for the 4 months to end December up 30% with a particularly strong showing in the EU. Even the UK improved by 23% when most other UK general retailers are reporting dire figures. It rather demonstrates the way the market is changing with shoppers, particularly the young, moving on-line.

But they do have a few more elderly customers. For example I recently bought a fedora hat from them as I thought it interesting to try out their service. Certainly a low price and very quick delivery but otherwise unexceptional in terms of “user experience” and could even be improved.

The share price rose 3% on the day and for the current year and next the prospective p/e’s are 73 and 59. There are many on-line competitors (Boohoo is a similar one in terms of target customers which I hold), and not many barriers to entry so I find it difficult to justify such high valuations years into the future. So I think I’ll stick with shopping with them rather than buying the shares.

Roger Lawson (Twitter: https://twitter.com/RogerWLawson )

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