As I speculated in March last year, car dealer Lookers (LSE: LOOK) was to enjoy a brilliant 2021. Throw in 2022’s gains so far and it’s now in serious danger of losing its penny stock status. Not that I expect holders will complain. 

Penny stock power

Since February 2021, shares in the small-cap have soared over 150%! Contrast this with the 17% and 8% uplift in the FTSE 100 and FTSE 250 respectively and I have more evidence of how minnows have the potential to turbocharge my wealth. This is assuming, of course, I select them carefully. A healthy bit of luck goes a long way too. 

Still, the reasons for Lookers incredible returns aren’t hard to fathom. A shortage of semiconductors and a consequent slowdown in manufacturing has accelerated the price of new and second-hand vehicles. This, when combined with the growth in savings as a result of multiple UK lockdowns, was always likely to benefit the £380m-cap company.

With Covid-19 travel restrictions throwing holiday plans into disarray, the rush to buy a new (or nearly new) set of wheels was inevitable in hindsight.

Can this continue?

January’s trading update certainly made for pleasant reading. Trading “remained strong” and “above the Board’s expectations” in the final quarter, thanks to “excellent new and used vehicle margins“. Like-for-like after-sales revenues were also up 7.1% compared to the previous year. 

The share price also received another huge boost at the end of last month after Constellation Automotive Holdings snapped up almost 20% of the company. According to chairman Ian Bull, the new investor regards the company as “significantly undervalued“. Then again, you wouldn’t expect them to say anything different. No less than 102p was paid for each share!

Time will tell if this proves to be a good bit of business. Lookers certainly appears cheap at face value. Even with the near-39% drop in earnings per share expected in 2022, the stock still changes hands at a P/E of just nine. A forecast dividend yield of 3.3% is also in the offing to prospective owners.

Based on these attractions, I’m cautiously optimistic this penny stock can continue rising. That said, I don’t doubt they’ll be some profit-taking soon. I also need to remember that margins are wafer-thin and demand will surely moderate as supply chains get back to normal.  

Bouncing back in 2022?

Since I highlighted its potential at the same time as Lookers, it’s worth mentioning that I remain optimistic about freight manager Xpediator (LSE: XPD). That’s despite the company’s share price coming back down to earth after motoring during the first half of 2021.

January’s trading update on FY21 didn’t contain any nasties as far as I could see. Revenue “in excess of £300m” is now expected. That’s growth of at least 36%. Adjusted pre-tax profit will also be “well in excess of £8.5m” compared to the £7.2m achieved in 2020. 

Looking ahead, a new 200,000 sq ft facility in Southampton is predicted to bring efficiency and capacity benefits this year. Increased business in Europe is also likely as Covid-19 restrictions are lifted.

For balance, it’s worth mentioning that this penny stock’s margins are as thin as those of Lookers. The current P/E of 13 is also fairly high, relative to the industry average, although the shares do come with a well-covered 3.1% dividend yield.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Here, I’m going to highlight five top AIM stocks I’d buy for 2022 and beyond. All five of these companies are already profitable (which reduces risk significantly), have good track records in terms of growth, and look set to benefit from powerful structural trends in the years ahead.

Software stock with momentum

One of my top AIM picks is Cerillion (LSE: CER). It’s a software company that provides billing, charging, and customer relationship management solutions for businesses.

There are a number of reasons I’m bullish here. For starters, the company has a lot of momentum right now. In its full-year results for the year ended 30 September 2021, revenue was up 25% to £26.1m while adjusted earnings per share (EPS) were up 105% to 25.5p. During the year, the group won a number of major new contracts.

Secondly, management appears to be very confident about the future. “Prospects for ongoing growth remain very strong. With a record back-order book and strong new business pipeline, we remain confident of continued momentum over the new financial year,” said CEO Louis Hall in the company’s full-year results.

Third, the company’s financials look very solid. Debt is low while return on capital employed (ROCE) – a key measure of profitability – is trending up.

Finally, the valuation seems very reasonable. At the current share price, the forward-looking price-to-earnings (P/E) ratio is about 30, which is not high for a software company.

Of course, there are risks to consider here. One is that, at this stage, recurring revenues are still relatively low (33% last financial year). So, the company will need to keep landing new contracts to generate top-line growth.

Overall, however, I think the risk/reward proposition here is very attractive for me.

Poised to benefit from economy recovery

My next pick for 2022 is Keystone Law (LSE: KEYS). It’s an innovative UK legal firm that operates a ‘platform’ model in which lawyers can work remotely.

There are two main reasons I like this AIM stock. The first is that the company looks well placed to benefit from the ongoing UK economy recovery. Higher levels of economic activity typically lead to higher demand for legal services.

The second is that as a platform business, the long-term growth potential here is significant. Unlike traditional legal firms, the firm is not constrained by office space. I expect its work-from-anywhere business model to be very appealing to lawyers across the country post-Covid.

A risk though is the valuation. Currently, Keystone Law sports a forward-looking P/E ratio of just under 40. This means the stock is priced for perfection.

This is a high-quality company, however. Over the last five years, revenue has climbed 163% while ROCE has averaged 26%. So, I think I can justify the higher valuation here.

A founder-led company

Another stock that could potentially benefit from the economic recovery is Alpha FX (LSE: AFX). It’s a leading provider of foreign exchange (FX) hedging services. It also offers payment solutions for businesses.

Alpha FX has a lot of momentum right now as well. In a December trading update, the company told investors that trading had remained “strong”. Additionally, it advised that revenue and earnings for 2021 would be ahead of expectations.

One thing I like about AFX is that the company is ‘founder led’. Research has shown that such companies often turn out to be good long-term investments.

I also like the growth here. Between 2015 and 2020, revenue climbed from £5.1m to £46m. For 2021, analysts expect revenue of £72m.

On the downside, this AIM stock is another one that’s expensive. Currently, the forward-looking P/E ratio is near 40. If growth slows, the share price could take a hit. I’m comfortable with this risk, however.

An stock for the 5G revolution

My fourth AIM pick for 2022 is Calnex Solutions (LSE: CLX). It’s a leading provider of testing and measurement services to the telecommunications industry.

The reason I’m bullish on CLX is pretty simple. Right now, the telecommunications industry is undergoing massive transformation as the fifth generation of network technology (5G) is being rolled out. 5G is ultimately the key to all the exciting new technologies we keep hearing about such as self-driving cars and remote surgery. This rollout of new telecommunications technology is likely to create a high demand for network testing services in the years ahead.

In November, Calnex posted a solid set of H1 results for the period to 30 September 2021. The company advised that it had experienced “strong levels of trading” in the first half of its financial year and that it was expecting this trend to continue in the second half. “We continue to capitalise on the global telecom industry’s transition to 5G and the growth of cloud computing,” commented CEO Tommy Cook.

A risk to consider here is the ongoing semiconductor shortage. This could potentially cause disruption. I think this is probably priced into the stock, however. Currently, the forward-looking P/E ratio is just 25, which is quite low relative to the company’s growth.

Growth at a reasonable price

Finally, I like Gamma Communications (LSE: GAMA). It’s a leading provider of business communications solutions.

One reason I’m bullish on Gamma is that the industry it operates in, ‘unified communications’, looks set for strong growth in the years ahead. According to Grand View Research, the industry is set to grow by around 21% per year between now and 2028. This growth should provide huge tailwinds for Gamma, which has grown its top line by over 100% in the last five years.

Another reason I like this AIM stock is that its share price has had a big pullback over the last few months. Back in September, the stock was trading above 2,300p. Today, however, it’s trading near 1,620p. I see this pullback as an opportunity. Currently, the forward-looking P/E ratio is just 23.

But of course, growth could slow in the near term. That’s because many businesses have pulled forward their communications spending during Covid. For long-term investors like myself, however, I think the risk/reward skew here is attractive.

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Edward Sheldon owns Alpha FX, Calnex Solutions Plc, Cerillion, Gamma Communications, and Keystone Law. The Motley Fool UK has recommended Alpha FX and Gamma Communications. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Fast fashion multi-bagger

The penny stock in question is Sosander (LSE: SOS). Providing “a one-stop online shop for style-conscious women who have graduated from price-led alternatives”, the company also boasts brand partnerships with FTSE 100 firm Next, FTSE 250 member Marks & Spencer, and John Lewis. Just like the aforementioned Boohoo and ASOS, Sosander makes full use of data analysis to gauge which products it should prioritise and the best ways of reaching its target audience. 

Despite only being around since 2016, the company was listed on AIM only a year later. Performance since then has been somewhat erratic. For example, the share price went from 45p in September 2018 to just above 5p when the first UK lockdown was announced. However, anyone brave enough to buy this penny stock back when the chips were down will have done extremely well. Since March 2020, the valuation has climbed roughly 560%!

Based on today’s half-year numbers, I think there could be even more upside ahead.

Sales soar at this penny stock

At £12.2m, revenue rocketed no less than 184% in the six months to the end of September. To put this in perspective, that’s more than in the whole of the previous financial year. Gross profit came in at £6.9m — up more than 200% — and gross margin hit a superb 56.5%.

Other positives include the number of active customers over the six months soaring by 41% to over 191,000. This suggests that co-CEOs Ali Hall and Julie Lavington have got their marketing strategy spot on. 

Like many penny stocks, Sosander remains loss-making. However, an EBITDA (earnings before interest, tax, depreciation, and amortisation) loss of just under £1m is lower than the £1.02m seen last year. In other words, things are going in the right direction. In fact, the Wilmslow-based business revealed that it was EBITDA positive in both October and November as shoppers snapped up partywear, outerwear, and knitwear. 

No sure thing

Perhaps unsurprisingly, Sosander stated that it was trading ahead of current analyst expectations for the full year. Unfortunately, the share price is barely up as I type. I think this is most likely due to traders being caught off guard by suggestions that existing vaccines may not be all that effective against the new Covid-19 variant. On another day, the reaction might have been a lot different.

Even so, it’s worth bearing in mind that Sosander is hardly a risk-free proposition. Although the company had seen “no material impact” from supply chain disruption so far, things could easily get worse before they get better. I’m also minded to remember that, pandemic or not, the £75m cap operates in a highly competitive industry where, I imagine, brand loyalty is increasingly hard to secure.

My verdict

No one can say for sure what will happen next with Covid-19. As promising penny stocks go, however, this is definitely one I’ll be adding to my watchlist. If general market sentiment dips again over December, I may just need to make room for Sosander in my portfolio.

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Paul Summers owns shares in boohoo group. The Motley Fool UK has recommended ASOS and boohoo group. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Fonix Mobile

Mobile payments and messaging firm Fonix Mobile (LSE:FNX) enables businesses from the media, charity, digital services and gaming sectors to charge users’ mobile bills. An example would when people donate to the BBC’s Children in Need campaign.

Right now, trading is good. Revenue and gross profit rose by 25% and 22% respectively over the second half of 2020. A pipeline of clients means more growth is expected in 2021.

In addition to being in a rapidly expanding area, Fonix also boasts staggeringly high returns on capital employed (ROCE). Companies that can do this consistently tend to create huge value for shareholders. No wonder star fund managers like Terry Smith and Nick Train pay so much attention to this metric. 

Naturally, investors need to be cautious. Fonix only arrived on the market last October so it’s still early days. I also question just how much of an ‘economic moat’ it really possesses. Still, the performance of the share price over the last year (+82%) does suggest investors are willing to give management the benefit of the doubt, for now.

tinyBuild

US-based video games company tinyBuild (LSE: TBLD) is another new AIM stock that could do well for investors over time. Its mission is to create long-term partnerships with developers and monetise popular titles across different forms of media. The puzzle game Hello Neighbour is one example of this.

Gaming remains a hot sector that should continue growing rapidly for the foreseeable future. Like all stocks however, there can be no guarantees tinyBuild will perform. Its shares also trade at 49 times forecast earnings. That kind of valuation will only seem reasonable to the most optimistic market participants.

A relatively small ‘free float’ (the number of shares available for investors to buy in the market) also implies the price may be volatile going forward.

On a positive note, tinyBuild’s founders still have big holdings, which should mean their interests are aligned with those of their investors.  The firm also boasts a strong balance sheet — one of the things I look for when buying small-cap shares.

Ilika

Ilika (LSE: IKA) is a final AIM stock I think has big potential. It’s focused on developing solid state batteries for applications such as the Internet of Things and electric vehicles. These have a number of benefits over traditional lithium-ion batteries, such as faster charging, longer life and non-flammability. As such, mass adoption seems to be a case of ‘when’ rather than ‘if’.

Notwithstanding this, Ilika is still loss-making. This probably makes it only suitable for risk-tolerant investors. Investors must also reflect on how well the shares have performed over the last year (+500%!) and whether a lot of hope is priced in.

Should markets shift into reverse gear as a result of ongoing concerns over inflation, blue sky stocks like Ilika could be hit harder than most. Then again, this might be the perfect time to begin building a position if buyers are content to be patient for the spoils that could lie ahead.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Fighting fraud with cyber-security

GB Group (LSE:GBG) is a global technology firm specialising in identity data intelligence. It’s very likely we’ve unknowingly encountered its technology at some point in time if we’ve ever used online banking or ordered a product via a website.

The business operates in three segments called Location, Identity, and Fraud. The first develops and provides software solutions to clients that accurately verify customer addresses for checkout systems. Besides giving an extra layer of security, it has subsequently made the checkout process for customers much faster. In 2020 alone, this technology was used over 140 million times each day worldwide.

The Identity segment provides rapid access to identity data and security solutions. These include financial databases, biometric scanners, and bank account validation systems. For anyone who has ever applied for a new credit card or started a new job, chances are this division was involved in verifying personal information. 

The final segment is directly fighting fraud. Its risk management & intelligence software platform uses artificial intelligence to combat cyberattacks as well as identify and eliminate fraudulent activity. It is currently being used at the heart of the global banking network.

Investing in AIM stocks always has risks

AIM stocks are typically in the early stages of their business cycles. As a result, they tend to carry additional risks. But this is not my primary concern regarding GB Group.

At the core of all three of its divisions is the reliance on data collection. The General Data Protection Regulation Act (GDPR) introduced many new restrictions that limit companies’ data-gathering capabilities. While this legislation only applies to Europe, similar laws are being imposed around the world. If the firm fails to comply with these rules, it would likely have a significant legal impact on the business that would significantly damage its reputation.

The stock also has to continually invest heavily into its own cyber security. With the amount of sensitive data flowing through its platforms, any security breach could also lead to devastating reputational damage. 

In either case, if customers lose faith in the security of GB Group’s technology, it would likely result in permanent revenue loss.

The bottom line

GB Group’s technology has proven to be critical in the fight against fraud. And is already being used by an A-list of clients that include IBM, Santander, and Lyft.

Personally, I believe the need for cyber security is exponentially increasing. Combining this with its proven technology makes the potential growth of GB Group outweigh the risks, in my mind. Therefore this is one AIM stock I’d like to own in my portfolio.

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Zaven Boyrazian does not own shares in GB Group. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Top growth stock

Its total sales grew by 9.4% to a little under £246m over the six months to the end of December. Like-for-like sales also increased by 7.8%. The latter may be slightly lower than over the same period in 2019 but I need to take into account just how bad 2020 was for most businesses.

According to CVS, this resilient performance was the result of growth in its main Practices division, coupled with higher demand at its online pharmacy and retail arm (Animed). As one might expect given the clamour for animal companions in 2020, the AIM-listed company saw an increase in new client registrations over the period.  Membership numbers of its Healthy Pet Club preventative medicine scheme also grew by 3.6% to hit 430,000. 

In other news, the company’s not-insignificant employment costs fell slightly, from 51% of total sales to 48.9%. The vet vacancy rate also declined.

To round things off, CVS Group was active on the acquisition front, purchasing four practices over the six-month period. I think this should only help to further cement its status as one of the leading veterinary services providers around. It now has more than 480 surgeries in the UK, Netherlands and Republic of Ireland. 

What now?

As far as trading is concerned, I suspect recent momentum will be sustained. All of CVS’s practices remain open, in line with guidance issued at the beginning of the third UK lockdown. Importantly, the company is now able to provide essential services relating to animal welfare rather than just emergency work.

Perhaps the biggest reason for continuing to be bullish on this growth stock, however, is that I simply can’t see the trend for pet ownership reversing. I also feel we’re unlikely to curtail spending on our furry friends, regardless of how the UK economy is performing. 

All told, the long-term prospects seem too good to me to bank profits this early. Even so, I have to be aware of the risks involved.

Volatility ahead? 

One thing that might lead the share price to lose steam is a good, old-fashioned bout of profit-taking. This wouldn’t feel unreasonable. After all, the value of CVS has more than doubled since the dark days of March. A forecast price-to-earnings (P/E) ratio of 27 suggests a lot of good news is already priced in. 

CVS certainly has form when it comes to violent, and protracted, share price swings. Between November 2017 and January 2019, the valuation of the company plunged as it struggled to recruit vets in light of the Brexit referendum outcome. While our departure from the EU might be one-off event, this doesn’t negate the fact that such falls are possible.

So, I wouldn’t sell had I bought a few months back. But while I do still think the shares could reward those with long investing horizons, I wouldn’t buy this growth stock today. I’m cautious over how much further the price could go in 2021 alone. As always, being sufficiently diversified elsewhere is key, regardless of how encouraging the outlook may be.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Here, I’m going to highlight three AIM growth stocks I like the look of right now. All three have pulled back recently so I think it’s a great time to buy.

A star AIM stock

One that strikes me as a buy today is online fashion retailer ASOS (LSE: ASC). It share price has climbed higher over the last year as the company has benefited from increased spending online. However, I think the growth potential here remains substantial. Realistically, online shopping is still in its early days.

ASOS posted an excellent trading update last week. For the four months to 31 December, total retail sales increased 24%. The company also advised that full-year profit before tax is likely to be at the upper end of market expectations.

However, in a classic case of ‘buy the rumour, sell the news’ the stock has fallen over 10% since this update. I view this pull back as an excellent buying opportunity. The forward-looking P/E ratio is now just 35, which I see as a very attractive valuation.

A cybersecurity play

A second AIM stock I like right now is GB Group (LSE: GBG). It’s a leading provider of identity management and fraud prevention solutions. In today’s world, in which online fraud is increasing at an alarming rate, I see GBG well-placed for success.

The group posted a good set of half-year results in December. For the six months ended 30 September, revenue was up 10% while adjusted operating profit jumped 25%. Meanwhile, the company said it has a “significant market opportunity” supported by accelerating structural growth drivers.

“GBG is well-positioned as digital acceleration is now even more a necessity for all companies. For the consumer-facing businesses we serve, key to their success will be making sure they know who and where their customers are,” commented CEO Chris Clark.

However, its shares aren’t cheap. Currently, the forward-looking P/E ratio is about 44. That lofty valuation does add risk.  But, overall, I think the long-term risk/reward profile here is attractive.

An AIM video game champion

Finally, Keywords Studios (LSE: KWS) is another AIM growth stock I’d buy right now. It’s a leading provider of technical services to the video game industry.

Video gaming has come a long way over the last few decades. Not so long ago, it was a niche hobby. Today, it’s one of the most dominant forms of entertainment across the world. Believe it or not, gaming now brings in more revenue globally than movies and music combined.

Looking ahead, the gaming industry is predicted to keep expanding rapidly due to advances in technology and the growth of e-sports. The industry growth should benefit Keyword Studios. This year, revenue is forecast to climb about 20%.

I last wrote about Keywords Studios in mid-November. After that article, the stock rose about 40% in the next six weeks. However, this year, it’s given back some of those gains. After the recent pull back, the forward-looking P/E ratio is about 43, which is expensive but not outrageous, in my view. I’d buy this AIM growth stock today.

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Edward Sheldon owns shares in ASOS, GB Group and Keywords Studios. The Motley Fool UK has recommended ASOS and Keywords Studios. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

When looking for shares to buy now, the biotech industry is not a bad place to start. This particular biotech stock has been the leading supplier of antibodies used in diagnostics for many years.

The opportunity 

Bioventix (LSE:BVXP) is a biotechnology company that specialises in manufacturing antibodies for blood testing machines. Hospitals around the world use its products to help diagnose heart disease, thyroid problems, fertility issues, cancer, and a plethora of infectious diseases.

Unlike other antibody creation labs, Bioventix uses a proprietary sheep monoclonal antibody (SMA) technology that far out-performs the competition.

The business has two revenue streams.

The first is the manufacture and distribution of its SMAs to in vitro diagnostics (IVD) companies around the world – such as Roche Diagnostics, Siemens Healthineers, and Abbott Diagnostics.

Currently, the company sells around 10–20 grams of the purified antibodies each year. Needless to say, it’s an expensive material.

The second source of revenue is from royalties. Whenever a client sells a diagnostic product that uses SMAs to their downstream customers, Bioventix receives a modest royalty. As it stands, these agreements generate approximately 70% of the company’s annual revenue.

This unique approach to business results in an ongoing source of money from its clients, after the sale of the product.

It also partakes in contract antibody creation programmes. Other companies pay Bioventix to develop a new antibody for exclusive use. The process typically takes one year. Once completed, the firm once again continues to receive royalties from each sale.

The financials 

The latest results from June 2020 revealed continued revenue growth of 11%. At first glance, this appears to be a slow-down from previous years. However, Covid-19 did cause disruptions to the routine of the global IVD market that resulted in a 15%–20% reduction in activity.

A diverse portfolio of antibodies drives the royalty revenue. Although, it is worth noting that the royalty agreement for NT-proBNP, which currently represents 13% of annual revenue, is set to expire in July 2021.

There are plenty of other products generating royalties ready to replace it. However, the loss of income may have a notable impact on 2022 annual revenue.

One of the best shares to buy now?

The highly regulated pharmaceutical industry is both a blessing and a curse. Regulators have already approved the SMAs, but not the products of its clients. Seeking approval is a very lengthy process that can take up to a decade of tests and trials.

This delays the royalties Bioventix is set to receive from its contract antibody creation programmes. To put this into perspective, the projects being developed today likely won’t yield royalty revenue until 2025–2035.

On the plus side, the long and expensive path to approval grants a significant competitive advantage. The process creates a large barrier to entry for competitors as they would have to pursue regulatory approval themselves. 

In my opinion, this form of competitive edge is a rare to come by. Whether they are the best shares to buy now is a personal decision, but Bioventix is definitely on my list as a possible addition to my portfolio.

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Zaven Boyrazian does not own shares in Bioventix. The Motley Fool UK has recommended Bioventix. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Is there still time for new investors to load up on this one-time penny stock and make money? Here’s my take. 

ASOS: beating expectations

Despite being confined to their homes for a significant proportion of the year so far, it seems many of ASOS’s customers were still looking for their fast fashion fix.

This morning, the AIM-listed business revealed that revenue growth for its full financial year (which ends on August 31) is now likely to be between 17% and 19%. It went on to say that pre-tax profit for FY20 would now be somewhere between £130m-£150m. 

Considering how awful 2020 has been so far, numbers such as these are great on their own. However, it isn’t just the amount of clothes ASOS has been shifting that surprised the market.

Far from buying a huge bunch of threads they don’t really intend to keep, it would appear that customers are making a lot more “deliberate” purchases. In other words, they are sending less back to the company. This is the opposite of what ASOS was expecting once lockdown restrictions were reduced. Indeed, it stated that it had seen “a significant and sustained reduction in returns rates since April”.

For a company that has been forced to investigate and shut down accounts that show an “unusual pattern” of buying and returning clothes in the past, this is clearly very welcome news.  

Cautious outlook

As good as today’s update is for holders, ASOS’s management isn’t getting carried away just yet. 

Like many listed businesses relying on discretionary spending, it highlighted that the “consumer and economic outlook remains uncertain“. There’s simply no way of knowing how long this “favourable shopping behaviour” will carry on for. 

Considering it’s just been confirmed that the UK is now in recession for the first time in 11 years, this all seems very reasonable. After all, a rise in unemployment translates to increased belt-tightening among ASOS’s target demographic.

What’s more, the possibility of a significant second coronavirus wave — and subsequent lockdowns — is still very real. Should this happen, I suspect those forced to work from home now have all the clothes they need. 

High valuation

At just over the 4,500p mark, ASOS’s share price hasn’t been this high since December 2018. That said, it’s still far off the high of around 7,600p seen about two-and-a-half years ago.

If it can achieve its goal of becoming “one of the few truly global leaders in fashion retail“, there’s a possibility it might one day return to this level. 

There is, however, a problem. In my view, many of ASOS’s qualities — a great brand, solid finances, decent earnings diversification — look to be already priced in.

Before this morning’s action, the stock changed hands on an eye-watering forecast price-to-earnings (P/E) ratio of 87! That’s already a mighty price to pay for any stock, even one that’s now beating expectations.

As an investor, I get nervous when nothing but perfection is expected from a company.

The time to buy ASOS was back in March. So, if we get another market crash, you’ll know what to do. 

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended ASOS. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Notably, the last couple of months witnessed Dart’s directors buying up the stock. CEO Philip Meeson now holds over 48m shares, more than all its institutional investors put together.

This is an owner-managed company signalling confidence in its forecast position. Is now a good time for us to buy into it too? 

The future of aviation

Investing oracle Warren Buffett famously advised investors to be greedy when others are fearful. And there’s little doubt that many are fearful of airlines right now. However, far from being greedy, Buffett recently dumped his airline stocks, very likely selling low after buying high. This indicates that he could also be fearful for the future of commercial aviation.

He may be right. The coronavirus pandemic is probably the toughest challenge yet for the airline industry. The global enforced shutdown destroyed passenger numbers almost overnight. In addition, fears about another virus peak and upcoming recession mean passenger numbers may take years to recover.

However, according to Dart Group, bookings are staying strong for late summer 2020 and winter 2020/21. Apparently, an “encouraging number” of people are choosing to rebook holidays with Jet2, its low-cost airline, rather than cancel them. It may be that people want to spread their wings after lockdown. If so, the travel industry may recover more quickly than expected.   

Dart Group share price fundamentals

Prior to the stock market crash, the Dart Group share price reflected the company’s noteworthy earnings performance. Revenues and pre-tax profits were trending upwards over the previous five years, and earnings per share increased from 21.3p in 2015 to 96.4p in 2019.

Compared with its competitors, Dart’s financial position is still very strong. Notably, it is the only one of its peers to report a net cash position. In other words, it’s still able to pay its short-term debts from the cash the business generates. By comparison, IAG and easyJet‘s net cash position is negative.

Dart Group’s recent sale of Fowler Welch, its former distribution and logistics business, for £98m will help this further. It may also assist the group in continuing to pay its 1.2% dividend yield to its shareholders. Although this dividend is small, it’s grown year on year since 2015. Something to bear in mind.

On the other hand, rising fuel costs, up to 20% of operating expenses for some airlines, reduced margins across the industry in 2019. Airlines often hedge their fuel costs and Dart Group’s Jet2 is no different. Consequently, the firm is likely to have already locked in higher fuel prices for the next year or two.  

However, no one could have predicted oil prices would tank so badly this year. With many airlines already having hedged their fuel costs, this is good news for companies like BP. Not so much for the Dart Group share price.

On the flip side, there may be future gains from any recent hedging activity. Possibly something for the firm to look forward to. 

Dart Group is a profitable ray of light in an otherwise gloomy aviation sector. It could be a great recovery buy as a riskier investment in an otherwise balanced portfolio. 

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