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Why I’d invest £2,000 in the Boohoo share price right now

Image source: Getty Images.

Back in early October, I declared my intention to forget Boohoo Group  (LSE: BOO) in a bearish article. But things have changed and I’m remembering the online fashion retail firm again. In fact, I’m warming to the shares and would be happy to invest £2,000 in them right now.

I was worried about valuation in October. The historic price-to-earnings (P/E) ratio stood close to 90, which didn’t give much room for error despite forecasts at the time for double-digit increases in earnings for the next two years. I argued back then that you’d need “a strong constitution to hold.”

A share-price correction

Since then, investors with Boohoo in their portfolios have indeed been tested. Today’s share price close to 164p is around 32% lower than it was after a steady decline since the autumn, which has brought the valuation back to digestible levels. The historic earnings multiple has fallen to around 60, and because of robust predictions for growth in earnings, the forward-looking P/E ratings fall to about 41 for the trading year to February 2019 and 33 the year after that.

My Foolish colleague Roland Head observed in a recent article that a profit warning in December from ASOS, the well-known online fashion clothing retailer, helped the decline in Boohoo’s share price because investors feared the firm might issue a similar warning. But it didn’t. Instead, as Roland pointed out, Boohoo’s update on the 17 December reported a strong performance including “record” Black Friday sales.

We’ll have to wait until 15 January for the next trading update, which will report on the four-month period to the end of December. However, I’m optimistic that the firm has done well and encouraged by decent trading figures for the Christmas period recently released by Next. If Next has done well, I think there’s a good chance that Boohoo will have done well also.

Growth remains on the agenda

There’s no dividend from Boohoo, so the firm remains a growth proposition. And growth seems very much on the agenda, driven by the firm’s own-label fashion clothing brands Nasty Gal, Boohoo and PrettyLittleThing. City analysts predict an earnings increase of around 26% for the next trading year to February 2020, which suggests the rate of growth is still impressive. However, the share price first reached its current level as long ago as March 2017, so the action has been volatile but essentially sideways since then.

Meanwhile, Boohoo has been growing into its valuation and one of the risks of holding the shares now is that process could continue for a considerable time. Indeed, it’s not unusual for once-vibrant growth stocks to stagnate for years as the rate of annual earnings growth slowly declines and the valuation continues to fall.

But I think Boohoo’s brands appeal to its customers and the firm could mature into a stalwart in the market similar to the way that Next has. So I’d take a chance with Boohoo shares now as part of a diversified and balanced portfolio.

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Kevin Godbold 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.