This year has been yet another positive one for Boohoo (LSE: BOO). The online fashion retailer’s share price has risen 38% since the start of the year. This follows a rise of 57% in 2015 and a gain of 288% in 2016.
Clearly, there will be concerns among some investors that the company now may be overvalued. Profit-taking is a potential risk facing the company, since no share price ever rises in perpetuity. However, with a solid growth outlook and a valuation which is not overly high, the stock could continue to shine.
Over the course of 2017 and 2018, Boohoo is expected to post earnings growth of around 28% per annum. This follows two years of double-digit earnings growth, and suggests that the company’s strategy is performing well. Although there is a risk to the business from a slowing UK economy, the group is geographically well-diversified. This means that its operational and financial performance could remain robust and that further double-digit profit growth could be recorded over a sustained period of time.
One factor which could make strong profit growth more likely is the company’s growth through acquisitions. It has thus far made several acquisitions in order to boost its top and bottom-line growth rates. This could help to maintain the company’s momentum and may mean it is worthy of a higher valuation.
Of course, most stocks which rise significantly over a relatively short time period are likely to end up with a high valuation. Boohoo has a price-to-earnings (P/E) ratio of 85, which suggests that it may be overvalued. However, when its earnings growth rate is factored-in, it equates to a price-to-earnings growth (PEG) ratio of around 3. This still appears rather high, and there are cheaper stocks within the retail sector. However, with the company having exceptionally strong growth prospects over the long term, its current price level may prove to be rather cheap.
More growth appeal
It’s a similar story for another company. Rotork (LSE: ROR) is an actuator manufacturer and flow control company which released a positive trading update on Thursday. It showed a rise in order intake in the third quarter of 11.8%, with revenue increasing by 5.1%. It has seen a continuation of more favourable market trends witnessed in the first half of the year and expects to meet guidance for the full year.
With Rotork forecast to post a rise in its bottom line of 10% in the next financial year, it appears to have strong growth potential. Certainly, its PEG ratio of 2.2 may not be the lowest within the sector, but the business appears to have solid foundations and diverse operations through which to deliver sustainable growth in earnings. Therefore, from a risk/reward perspective, the stock seems to be worth buying alongside Boohoo. Their premium valuations seem to be a price worth paying given their long-term outlooks.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK has recommended boohoo.com and Rotork. 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.