Online fashion retailer Boohoo.com (LSE: BOO) has been something of a falling star over the past five months with the shares sliding more than 30% between September and the beginning of February. But to put that fall in perspective, investors enjoyed a meteoric rise of more than 900% between the early part of 2015 and last November, driven by punchy earnings growth figures and a valuation re-rating.
Growth story far from over
A decent correction now is natural and healthy because the valuation became too rich, and over the past five months, we’ve seen some unwinding of that. Yet Boohoo is still scoring decent double-digit advances in earnings and if that continues, at some point the slide in the share price will halt as it bumps into the operational growth curve of the underlying business.
Since the beginning of the week, the stock has moved up around 9% at today’s 188p, and I’m watching closely for evidence that this upturn signals a halt in the wider fall. Indeed, the long-term growth story seems far from over. City analysts following the firm expect earnings to expand by around 34% for the year to February 2019 and 27% the year after that. Those are robust growth figures that could go on to support the punchy valuation the market still assigns the shares – at today’s share price around 188p the forward price-to-earnings ratio for the trading year to February 2020 stands close to 41.
Maybe the slide in the share price hasn’t finished yet. If that proves to be the case, I reckon the stock will become ever more attractive as it falls, as long as those earnings growth figures hold up, which looks likely. In an update delivered on 11 January, the firm advised of constant currency total revenue for the 10 months to 31 December 2017 some 97% higher than the year before, a figure that beat the directors’ previous expectations. All three of the company’s main divisions Boohoo, PrettyLittleThing and Nasty Gal are performing well.
A mark of quality?
Boohoo is capturing a big chunk of the growing online market for fashion. The firm’s offering appeals to shoppers and the growing revenue and profit figures are a testament to the firm’s success. As such, this is an out-and-out growth story, which means the firm could deserve a high valuation rating. That well-known growth investor from a previous generation Philip Fisher argued that a high rating can be seen as a mark of quality as long as the underlying growth story remains robust.
So, in a situation like this where the shares have been higher and where the growth figures keep rolling in, how do we know when to buy back into the shares? To me, the best method of judging things is to study the share price chart after ensuring that the underlying enterprise remains sound and growing. The chart provides a record and gauge of the sentiment of all investors participating in the stock. After a correction like we’ve seen, I’m looking for basing on the chart and a steady move upwards again before re-entering, which could be happening right now.
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Kevin Godbold has no position in any of the shares mentioned. The Motley Fool UK has recommended boohoo.com. 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.