The Boohoo (LSE: BOO) share price has had an awful 2021. Following today’s trading update, it just got even worse. Now down 66% year-to-date, it’s hard to come across many people with a good thing to say about the former market darling. In fact, something’s come to my attention that suggests things might get even worse before they get better.
Boohoo share price: attack of the shorters!
According to shortracker.co.uk, the number of short-sellers targeting Boohoo has increased significantly.
Short-selling (betting a share price will fall) is a risky business. While the gains from betting long on a stock are technically infinite, there’s always a limit to the extent these traders can profit. In other words, a share price can’t go below zero. This makes it important for any shorter to be extremely confident in their view that Boohoo will continue to struggle.
At this point, it’s worth highlighting that the fast-fashion giant is far from being the most shorted stock on the UK market. That dubious accolade (justifiably) goes to heavily-indebted Cineworld. However, Boohoo is now 13th on the leaderboard, not far below battered FTSE 100 member International Consolidated Airlines.
Buy, sell, or hold?
As a shareholder, it goes without saying I haven’t enjoyed Boohoo’s recent form. The emergence of a significant minority of short-sellers is another headache. Having said this, I’m not intending to sell for a few reasons.
First, Boohoo has survived such selling pressure before. Back in May 2020, hedge fund ShadowFall claimed the company was overstating its profits and cashflow. These allegations were quickly refuted and shareholders regained their composure.
Second, many online retailers are struggling right now. Industry rival, for example, ASOS continues to suffer. Lockdown beneficiary AO World has fared even worse. So it’s simply not the case that everyone else is getting richer while Boohoo’s owners suffer.
Third, if sentiment is already low, it takes just a bit of better-than-expected news to generate a ‘short squeeze’ where those betting against a company rush to close their positions. This can often put a rocket under a share price.
Lastly, I’ve made a point of being sufficiently diversified elsewhere not to make selling my holding at (possibly) the worst time even necessary. Successfully mitigating risk in tis way is key to staying in the investment game and applies to all my holdings.
Perhaps I’m just biased. There’s no rule to say the Boohoo share price won’t fall even further, especially after today’s statement.
While demand in the UK looks steady, overall net sales only rose 10% in the three months to 30 November due to a much higher amount of clothes (particularly dresses) being returned. Performance abroad has also suffered from longer delivery times/higher costs. As a result, Boohoo is now guiding full-year net sales growth of between 12% and 14%. That’s a big reduction to the 20% to 25% previously expected.
Worrying as all this is, these numbers (and the presence of shorters) merely confirm what we already know: times are tough and this company is firmly out of favour. And, seen through a long-term lens, the best time to buy a company is often when things look bleak.
With its growing portfolio of brands, huge overseas growth potential, new distribution network and strong finances, I’m cautiously optimistic Boohoo will rise again.
Will I sell? No. Hold? Yes. Buy more? Possibly.