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Volatility 101: Should ASOS (LON:ASC) Shares Have Dropped 38%?

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In order to justify the effort of selecting individual stocks, it's worth striving to beat the returns from a market index fund. But the risk of stock picking is that you will likely buy under-performing companies. Unfortunately, that's been the case for longer term ASOS Plc (LON:ASC) shareholders, since the share price is down 38% in the last three years, falling well short of the market return of around 24%. It's down 6.7% in the last seven days.

View our latest analysis for ASOS

While markets are a powerful pricing mechanism, share prices reflect investor sentiment, not just underlying business performance. By comparing earnings per share (EPS) and share price changes over time, we can get a feel for how investor attitudes to a company have morphed over time.

During the three years that the share price fell, ASOS's earnings per share (EPS) dropped by 11% each year. The share price decline of 15% is actually steeper than the EPS slippage. So it seems the market was too confident about the business, in the past. Of course, with a P/E ratio of 108.36, the market remains optimistic.

The graphic below depicts how EPS has changed over time (unveil the exact values by clicking on the image).

AIM:ASC Past and Future Earnings, January 20th 2020
AIM:ASC Past and Future Earnings, January 20th 2020

We like that insiders have been buying shares in the last twelve months. Having said that, most people consider earnings and revenue growth trends to be a more meaningful guide to the business. It might be well worthwhile taking a look at our free report on ASOS's earnings, revenue and cash flow.

A Different Perspective

ASOS shareholders are up 5.3% for the year. Unfortunately this falls short of the market return. The silver lining is that the gain was actually better than the average annual return of 3.0% per year over five year. This could indicate that the company is winning over new investors, as it pursues its strategy. I find it very interesting to look at share price over the long term as a proxy for business performance. But to truly gain insight, we need to consider other information, too. For example, we've discovered 2 warning signs for ASOS (1 makes us a bit uncomfortable!) that you should be aware of before investing here.

There are plenty of other companies that have insiders buying up shares. You probably do not want to miss this free list of growing companies that insiders are buying.

Please note, the market returns quoted in this article reflect the market weighted average returns of stocks that currently trade on GB exchanges.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.