While for many investors a 30% fall in a company’s valuation may be seen as a bad thing, for value investors it can make the stock a more enticing opportunity. After all, if it is a high-quality company with growth potential, then it could mean that the risk/reward ratio has moved further in an investor’s favour.
As such, the investment appeal of online fashion retailer Boohoo (LSE: BOO) seems to have increased in recent months. Its shares now seem to offer better value for money after their 30% fall in the last year. In contrast, a growth stock reporting encouraging performance on Tuesday now seems to be significantly overvalued.
The company in question is global music and audio products specialist Focusrite (LSE: TUNE). It released a trading update for the financial year to 31 August and has delivered growth in revenue and profit when compared to the previous year. Its performance has been in line with expectations, with revenue expected to be 15% higher than in the previous year.
The business has been able to deliver growth across all of its major regions. Its core categories have performance well, with new programmes delivering positive results so far.
Looking ahead, Focusrite is expected to build on its strong performance in the last three financial years, where earnings have risen in each year. Its bottom line is due to rise by 6% in the current financial year, and this suggests that its strategy is working as planned. However, since the stock has a price-to-earnings (P/E) ratio of around 28, it appears to lack a margin of safety. As such, now may not be the right time to buy it following its share price rise of 223% in the last year.
Value for money
In contrast, Boohoo’s shares seem to offer excellent value for money at the present time. As mentioned, they have endured a disappointing 12-month period, but the performance of the company from a business perspective continues to be upbeat. It is forecast to post a rise in earnings of 18% in the current year, followed by further growth of 24% next year. This puts the stock on a price-to-earnings growth (PEG) ratio of 1.6, which is relatively low compared to its historic valuations.
Boohoo recently announced a change in CEO. The current joint-CEOs will take up different positions at board level, with a new CEO joining from Primark set to focus on building the firm’s brands yet further. This could be a shrewd move by the company, since a broader skill set may be required now that it has reached its current size.
With demand for its products likely to remain high due to their price point and focus on customer service, the outlook for the company remains bright. Although further share price falls cannot be ruled out in the short run, in the long run there could be significant growth potential on offer.
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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has recommended boohoo group. 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.