Hedge fund Marshall Wace has been spending October slowly building a short position in ASOS (LON:ASC), according to regulatory data (daily FCA short disclosure report). The hedge fund increased its short position in ASOS to 1.32% last week, but it has built that up from 0.67% on 7 October.
ASOS has been a favoured short side target with the hedge funds, having hit peaks of close to 8% of stock shorted in early 2016 and again in early 2019. That had slumped to almost zero by the start of 2021 but it looks like ASOS is attracting some more activity.ASOS disappointed City analysts earlier this month, after many investors were backing the company thanks to its bumper year of profits during the COVID lockdown. This time it is all about the supply chain pressures and rising costs, but it has resulted in the resignation of CEO Nick Beighton.
This was a big loss for ASOS in our view as Beighton had been with the company for 12 years including six as its CEO. Also going is chairman Adam Crozier, who is heading over to be chair of BT. That means a leadership transition and potentially a change of strategy, which also means a rudderless ship. This is excellent territory for hedge funds and short traders. The boys and girls at Marshall Wace know what they are doing.
ASOS has been here before
Nils Pratley, writing in the UK’s Guardian newspaper, also points out that every time the ASOS share price hits £60, it halves within 12 months. He points out that it has happened three times now, kicking off in 2014 when there were concerns about profit margins. Pratley suspects this time it is the global expansion plans, which have proved lacklustre, which is causing ructions at board level.
“In the circumstances, a boardroom shake-up makes sense but ASOS suddenly looks a more complicated story than ever,” Pratley writes. “The company still has to prove that Topshop, Topman and Miss Selfridge can enjoy profitable second lives online.”
Beighton will remain “available to the board” of ASOS until the end of the year, but let’s not kid ourselves here. ASOS has forecast FY2022 sales growth in the range of 10-15% with first half revenue growth somewhere in the mid-single digits. Important, however, is the use of the phrase “tougher comparables in the first half of the year” which ASOS is putting down to industry-wide supply chain pressures.
Online retail suddenly looks a lot tougher
This is not what investors will want to read, especially if they have bought into Beighton’s vision of the sunny uplands of online retailing. It was all going to be so glorious, but perhaps the impact on the pandemic – and indeed Brexit – on supply chains was not properly factored in?
The ASOS share price has proved to be something of a car crash since early July, when it toppled off a cliff from around 5250 to hit what looks like a temporary floor of 2266. The company has a PE of 22.49 and is now down over 40% on the year, but it looks like there could be more to give on the short side.
The biggest worry for investors is going to be who takes over and whether they can turn this ship around, followed by the impact that the ongoing supply chain crisis is going to have on the company.
