ASOS and Sainsbury s two stocks to watch this week

Shares in ASOS and Sainsbury’s will likely grab some of the headlines this week as both retailers report their respective earnings to the market with great interest. Both stocks have outperformed the market recently and their earnings are another opportunity for investors to gauge whether momentum remains the key word to describe both stocks.

I’ll start with Sainsbury’s.

Sainsbury’s report their Q1 sales figures to the market on Wednesday, 12^th June at 7am. In its preliminary results announced in May, the supermarket retailer saw like-for-like sales up 1.8% and underlying pre-tax profits up 6.2% to £756mn on revenues of £23.3bn.

This time around there are high expectations that Sainsbury’s could report strong first quarter sales figures in stark contrast to a fall in sales at chief rival Tesco for the same period. Yet investors should remind themselves that there are some relatively tough comparatives for Q1, which last year included an extra bank holiday for the Queen’s jubilee celebrations. In addition to this, the weather for the quarter this year has not be great, which traditionally hampers consumer spending. Morgan Stanley is forecasting like-for-like sales growth of 0.6%, which if proved true would be the slowest sales growth for the firm in three years. Yet considering the performance of the broader market within the comparatives, this is not necessarily a deep concern.

Kantar Worldpanel, the retail researcher confirmed that Sainsbury’s market share had grown to 16.8% in Q1 from 16.5%, which marked the largest share for the retailer in over a decade. This compared to market leader Tesco, whose share fell to 30.2% from 30.8% a year ago. At the same time, the market is becoming increasingly polarised as budget retailers continue to grab additional market share. Aldi’s share grew by 31.5% to 3.5% of the market, its highest ever. The retail landscape remains incredibly challenging.

Investors need to see Sainsbury’s meet market expectations. A sharp slowdown in sales to 0.2%-0.4% would be a concern that Sainsbury’s outperformance is starting to reach the top of its cycle, which is something investors are not necessarily used to.

The 400p level remains a significant hurdle in the firm’s shares price, however. Prices have failed to break above this level since the start of 2008 despite no less than six attempts to do so. It remains a popular profit taking level, as witnessed by the recent 9% declines from mid-May. That said, prices are trading at near term support levels of 360p and positive earnings may be enough to see Sainsbury’s attempt another attack at the 400p level. The 400p level remains a significant test.

On to ASOS.

ASOS shares remain attractive to investors as the share price continues to exude positive and sharp upward momentum. Having seen shares lose more than half their value in an aggressive price correction during the second half of 2011, prices have since rallied 259% to trade above the £40 mark. That’s extremely impressive.

Of concern would be the trajectory that prices have been rising. The sharper price rise opens up the potential for price corrections. Shares have rallied 36% since the start of May, which raises doubts about the sustainability of this rally at its current trajectory.

ASOS shares have received multiple broker upgrades recently, with HSBC being the latest bank to raise their price target from 3660p to 4380p this morning. This joins Peel Hunt, Societe Generale, UBS and Deutsche Bank, who have all had positive ratings on the stock.

Of importance for their quarterly earnings report, which is released on Wednesday before the UK market opens, is continuing like-for-like sales growth and margins. In April, ASOS reported first half sales had increased by 34% with profits rising by 11% to £25.69mn. But of concern was a drop in margins by 60 basis points, or 0.60%. These are the two aspects investors will be focusing on. Given the sharp price rises recently, it may require a superb sales growth number to meet heightened investor expectations. Whilst a disappointment in numbers or even figures that meet expectations may see investors start to bank profits, any fall in share price of 10% could be seen as a buying opportunity.