The Motley Fool

Why I’d buy this growth stock over Boohoo.Com plc

The shares of online fashion retailer (LSE: BOO) have slipped around 30% since the summer. However, City analysts expect earnings to grow 25% for the year to February 2018 and 29% the year after that.

The current wobbles aren’t down to the quality of the operation, or to declining growth prospects, it seems. The underlying business is flogging mass-market fashion online at a furious rate and continuing to gain market share. The issue driving the share-price reversal appears to be valuation. Even now, at 191p or so, the shares trade on a forward price-to-earnings (P/E) ratio of around 54.

High valuations can be risky

At that level, investors are putting faith in the company’s ability to keep growing at substantial double-digit percentages. It may do that, but any stumble could send the stock plummeting and recent weakness could end up looking like a gentle undulation in comparison.

To be fair, anyone who took the plunge with Boohoo at the beginning of 2015 and held today will have a capital gain of around 730%, even after the recent pullback. If I was sitting on that kind of result from the firm, I’d take at least some money off the table and reinvest it elsewhere, such as in fast-growing middle-market retailer Ted Baker (LSE: TED), which released its interim results today.

The firm’s array of fashion clothing, accessories and homewares occupy a higher price band than Boohoo’s offering, but that hasn’t stopped a rapid expansion across Britain and abroad. In fact, it looks like one of the main drivers of sales could be the desire of many to wear or own Ted Baker and other more expensive premium goods.

The figures are good. Compared to a year ago, revenue at constant currency rates moved up 9.5% and adjusted earnings per share grew by 12.4%. The directors pushed up the interim dividend by a little over 12% to celebrate.

Fast growth at a reasonable price

The firm trades from stores in the UK, mainland Europe, North America and Asia, and has a fast-growing online operation that delivered a robust-looking 44% uplift in turnover. The e-commerce division accounts for 15% of total sales now, but if the rate of expansion continues, e-retail could be a big driver of future earnings growth in the future. Growth is also perky in the Asian division, which grew sales by almost 20%. Although Asia only contributed 4% to total sales, the opportunity for further gains there looks exciting.

Chief executive Ray Kelvin CBE assured us in today’s report that the firm has a clear strategy for the development of the brand across both established and newer markets.” Right now, the company has 192 full price and outlet stores in the UK, 108 in Europe, 119 in North America, 82 in the Middle East, Asia and Africa, and 10 in Australasia. I think we’ll see a lot more added to that list over the coming years.

Ted Baker is expanding fast, but what I really like about the story, compared to Boohoo’s, is the undemanding valuation. At today’s share price around 2,840p, the forward P/E rating runs just below 20 for the year to January 2019.

Mistakes can be costly

Paying too much for growth, such as with Boohoo now, could end up seriously damaging your wealth. But paying too much isn’t the only common mistake we investors make.

The Motley Fool's experts have published a FREE report called The Worst Mistakes Investors Make, which identifies other common wealth-destroying practices to avoid.

This free guide won't cost you a penny (so won’t add to the problem) but could save you hundreds or thousands of pounds. To get your copy, CLICK HERE.

Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended and Ted Baker plc. 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.