These two UK shares are due to update investors in the coming days. Should you buy them today or steer well clear?
You might be tempted to buy shares in Motorpoint Group given the recent strength in the used car motor market. Latest data from online car shopping website Auto Trader showed the average price of a pre-owned vehicle leap 7.6% in September, the highest year-on-year jump on record.
Demand for used vehicles has leapt for a couple of reasons. A fear of using public transport has prompted Britons to go car shopping during the peak of the pandemic. Difficult economic conditions have caused shoppers to switch down from buying more expensive new vehicles to cheaper, previously-owned units too. And it’s a phenomenon which has already boosted sales at Motorpoint.
In late August the retailer commented that “over the last 11 weeks, the period which the Group’s retail sites have been fully reopened, the board has seen its key operational and trading metrics comfortably ahead of the equivalent period last year.” I’m expecting another sunny statement when half-year numbers come out on Thursday, August 8. But I won’t be buying Motorpoint shares any time soon.
Why? Well recent data shows that sales of new cars are starting to slump at an alarming rate. It might take longer but I fear that the severe economic downturn facing the UK — not only due to Covid-19, but because of ongoing Brexit uncertainty and/or economically-disastrous ‘no-deal’ withdrawal from the European Union — could start to hammer sales of other big-ticket products like used cars as well.
According to the University of Buckingham, sales of used vehicles in the UK slumped to 17-year lows during the 2008/2009 global financial crisis. I fear that a period of significant sales weakness for the likes of Motorpoint Group could now be in the offing. And this is why, despite its low forward price-to-earnings (P/E) ratio of 13 times and chunky 3% dividend yield, I won’t be buying this particular UK share today.
I’d much rather buy shares in ASOS. Like Motorpoint, this particular UK share is in theory in danger of sinking as the broader retail sector comes under pressure. However, the clothing giant has two terrific tricks up its sleeve.
Firstly, ASOS’s products can be picked up at extremely low prices. This doesn’t smack demand for its goods any where like that of more expensive retailers like Next and Zara. In fact ASOS is likely to benefit from consumers ‘switching down’ and choosing cheaper fashions to stretch their budgets that little bit further.
Secondly, ASOS’s e-commerce-only model means that it has a more sophisticated online operation than many of its rivals. As a consequence it’s in better shape to ride the exploding internet shopping spectacle and to build on it in the years ahead. According to the boffins at Statista, online sales of clothes and footwear (based on sales per week) rocketed 61% in the five years to December 2019. The impact of Covid-19 on shoppers’ movements has given e-commerce adoption and sales rates an extra shot in the arm more recently, too.
During the summer ASOS announced that its performance in the financial year ending August 2020 would be “significantly ahead of market expectations” when numbers are released on Wednesday, October 14, with sales up between 17% and 19% year on year. Today the retailer trades on a rock-bottom forward price-to-earnings growth (PEG) reading of 0.2. And I think this makes the UK share a great pick for value investors.