Over the past year, fast-fashion clothing retailer boohoo (LSE: BOO) has seen its stock plunge by around 75% to today’s level near 91p.
The one-time market darling used to be something of a leading stock. And a multi-year record of robust annual increases in earnings caused the share price and the valuation to soar.
The fall of boohoo stock
So, what went wrong? In simple terms, the business went ex-growth. Instead of the mid-double-digit annual increases in earnings we’d become used to, boohoo posted expectations of a decline in earnings by around 35% for the trading year to February 2022. And as so often with high-flying growth companies, the stock market has been unforgiving when marking the share down for its transgression. And, as usual, investors saw it coming because the stock had been falling all year.
The problem is so common among growth stocks that veteran successful trader Mark Minervini has a rule of thumb for the situation. He reckons that there’s a 50% chance high-growth stocks will plunge by 80% at some point and an 80% chance they’ll decline by 50%. In the case of boohoo, he’s been on the money.
I’m a long-term investor at heart, but I’m not ignoring the wisdom of traders like Minervini because they’re often so skilled at reading the dynamics of stock prices and stock markets. And holding on too long to past winners is a ‘sin’ I’ve committed many times — I need to pull my socks up!
boohoo issued a trading update in December 2021 containing a profit warning — never a good look for a growth company. The directors said expectations for the financial year to 28 February 2022 were lower than previously guided. And they explained the situation by pointing to “significantly” higher returns rates “impacting net sales growth and costs.”
They also mentioned the ongoing disruption to the company’s international delivery proposition “impacting international demand.” On top of that, another problem for the business has been the “significant ongoing pandemic-related cost inflation.”
Earnings look set to rebound
City analysts expect earnings to bounce back by around 11% during the current trading year. And the forward-looking earnings multiple sits just below 17 — not that cheap. But even if the business realises that profit outcome, earnings will still fall well short of those achieved in the trading year to February 2021. As I said before, boohoo has gone ex-growth and the best we can hope for now is a business recovery — at least in the short term.
But is boohoo a no-brainer stock to buy now? Not to me. In fact, it seems somewhat unattractive. For example, there’s no shareholder dividend. And that’s acceptable when a business is posting strong growth but I don’t like to see zero shareholder income when growth is absent.
But there’s another reason I’m steering clear of boohoo stock now. Minervini has it that past market leaders rarely lead the next bull run in the markets. And that makes sense to me because I find it hard to imagine the boohoo business ever posing impressive increases in annual earnings as it did before.
I could be wrong and it may once again shoot the lights out. But if it does, it will be without me holding any of the shares.
