As the boohoo share price makes it a penny stock, I’m buying

The beaten down boohoo share price has led Christopher Ruane to add it to his portfolio. Here he explains his investment decision.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

A lot of people are used to buying things cheap from online retailer boohoo (LSE: BOO). But lately, the most striking thing on sale has been the boohoo share price. After collapsing 74% in 12 months, the company now trades as a penny share.   

Although I see risks, I do think the share price is a buying opportunity for my portfolio. Here is why.

Bull case for boohoo

A lot of things can affect a company’s share price in the short term. I think that can be seen right now with what is happening at boohoo.

Should you invest £1,000 in Boohoo Group right now?

When investing expert Mark Rogers has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for nearly a decade has provided thousands of paying members with top stock recommendations from the UK and US markets. And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Boohoo Group made the list?

See the 6 stocks

Cost inflation and logistics challenges have been eating into profit margins. That is true for many retailers right now. But as boohoo sells clothes at very low prices, it has less ability to absorb cost increases than some of its competitors.

On top of that, some large investors have been selling boohoo shares even as the price has been in freefall. Fund manager Jupiter used to own almost a tenth of the company, but has recently sold half its stake.

But I see these sorts of challenges as essentially temporary in nature. In the end, I expect the company to bring its cost base in line with its business needs, even if that means raising its prices. A large shareholder cutting a stake is part and parcel of doing business as a listed company. When the short-term noise dies away, what remains is the underlying business case for boohoo. I remain positive about that.

It has a well-recognised brand and has been growing revenues fast. Last year, for example, it reported a sales increase of 41%. Its aggressive expansion in the massive US market could help sales keep growing at speed. Profits have also been increasing for a few years in a row and last year reached £93m after tax. Despite the penny share status, this is a proven, profitable business, not some digital start-up with no pathway to earnings.

Bear case for boohoo

Clearly, the company continues to have a number of critics. The business model forces it to be very competitive and allows little margin for error, due to tight profit margins. That is a risk in clothes retail, where predicting upcoming trends or weather conditions accurately can make the difference between a healthy profit and a costly warehouse of unsold stock.

It has also led to criticism about sweatshop conditions at some of the company’s suppliers. I think boohoo has been serious about engaging with these concerns. But its low-price model means legitimate complaints about labour conditions could well come back in future. As consumers show more concern about the environment, the whole fast-fashion model could be a source of reputational damage for companies including boohoo.

Why I’m buying the boohoo share price

Despite that, I have been adding boohoo shares to my portfolio lately.

I think the concerns are valid, but the markdown in the boohoo share price has been overdone. The profitable company currently trades at a price-to-earnings ratio of around 12. Given its proven high growth potential, that seems cheap to me. The next couple of years may be tough for the business, but I see long-term value for my portfolio at the current boohoo share price.

5 stocks for trying to build wealth after 50

The cost of living crisis shows no signs of slowing… the conflict in the Middle East and Ukraine shows no sign of resolution, while the global economy could be teetering on the brink of recession.

Whether you’re a newbie investor or a seasoned pro, deciding which stocks to add to your shopping list can be a daunting prospect during such unprecedented times. Yet despite the stock market’s recent gains, we think many shares still trade at a discount to their true value.

Fortunately, The Motley Fool UK analyst team have short-listed five companies that they believe STILL boast significant long-term growth prospects despite the global upheaval…

We’re sharing the names in a special FREE investing report that you can download today. We believe these stocks could be a great fit for any well-diversified portfolio with the goal of building wealth in your 50’s.

Claim your free copy now

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Christopher Ruane owns shares in boohoo group. The Motley Fool UK has recommended Jupiter Fund Management 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.

More on Investing Articles

Tesla building with tesla logo and two teslas in front
Investing Articles

Is this the Tesla stock buying opportunity I’ve been waiting for?

Christopher Ruane has been itching to add some Tesla stock to his portfolio. After it crashed in the past fortnight,…

Read more »

DIVIDEND YIELD text written on a notebook with chart
Investing Articles

This FTSE 100 stock goes ex-dividend on 26 June — time to bag a 6.9% yield?

British American Tobacco shares offer one of the highest dividend yields in the FTSE 100 index. Passive income investors should…

Read more »

ISA Individual Savings Account
Investing Articles

3 reasons I won’t let ChatGPT anywhere near my ISA!

Christopher Ruane won't be entrusting any decisions about his ISA to AI tools like ChatGPT. Here's why he's keeping things…

Read more »

Tree lined "tunnel" in the English countryside of West Sussex in autumn
Investing Articles

Has Warren Buffett made his best move ever selling his Apple stock?

With Apple stock nearly a quarter off its all-time high, Andrew Mackie looks at some of the challenges it faces…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

3 simple Warren Buffett wealth-building techniques you could use today

Christopher Ruane thinks these three Warren Buffett approaches to investing could help someone immediately as they aim to build wealth.

Read more »

The Milky Way at night, over Porthgwarra beach in Cornwall
Investing Articles

Here’s how to build a £10k+ second income from just 5 shares

By investing in a handful of carefully chosen blue-chip shares, this writer thinks an investor could aim to set up…

Read more »

Close-up as a woman counts out modern British banknotes.
Investing Articles

These 5 shares could generate a £1,584 annual passive income from a £20k lump sum

Christopher Ruane outlines a handful of British shares he thinks an investor who wants to earn passive income may want…

Read more »

Mature black woman at home texting on her cell phone while sitting on the couch
Investing Articles

Down 18%, are we witnessing the slow decline of Alphabet stock?

Andrew Mackie assesses the future growth of Alphabet stock, in the light of generative AI upending the traditional internet search…

Read more »