The prospects for the UK retail sector remain extremely uncertain. Consumer confidence is weak, and could deteriorate further should the Brexit process lead to further challenges over the medium term.
As such, investing in a share such as online fashion retailer Boohoo (LSE: BOO) may not seem like a shrewd move. After all, the sector is experiencing fundamental changes, while a weak economy could weigh on the industry’s performance.
However, alongside another stock which released an update on Monday, Boohoo could be worth buying for the long term. Both shares appear to have brighter futures and lower valuations than many investors may realise.
Margin of safety
The company in question is Petra Diamonds (LSE: PDL). It released a first quarter trading update which showed a rise in production of 21%. This boosted revenue by 22% to $80.2m even though diamond prices were down by 5% on a like-for-like (LFL) basis. Encouragingly, the company remains on track to deliver positive free cash flow in the 2019 financial year. And while its net debt increased to $538.9m from $520.7m as at the end of June, this was in line with expectations.
Looking ahead, the world economy continues to experience an uncertain future. The threat of a higher US interest rate and the potential for a full-scale trade war could hold back investor sentiment towards the resources sector.
Petra Diamonds, though, is forecast to post a rise in earnings of over 100% in the current year, which puts its shares on a forward price-to-earnings (P/E) ratio of around 6. This suggests that they offer a wide margin of safety. Although they may prove to be volatile, they could offer high returns in the coming years.
As mentioned, the UK retail sector also faces a difficult future. However, online operators such as Boohoo could enjoy a tailwind from the continued transition of shoppers towards online. This trend is set to continue in future years, and may mean that digital opportunities for growth remain high.
Looking ahead, Boohoo is set to undergo significant change. It is due to replace its co-CEOs with an executive from Primark, and this could provide its strategy with a boost over the medium term. Given that the company is forecast to post earnings growth of 18% in the current year, followed by 24% growth next year, its business model appears to be performing well even in a challenging UK economy.
Of course, the company has significant international exposure. This is likely to be a key focus of future investment, and could help to diversify its business away from the UK at a time when its outlook is uncertain ahead of Brexit. And since the stock trades on a price-to-earnings growth (PEG) ratio of around 1.6, it seems to offer fair value for money given its long-term growth prospects. As such, now could be the right time to buy it, even though a number of its sector peers could struggle to perform well in a difficult UK retail environment.
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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.