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This is what I’d do about the Boohoo share price today

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For most of 2016 and 2017, online fashion retail company Boohoo Group  (LSE: BOO) was a growth investor’s dream stock. The share price shot up around 575% over the period, only faltering as late as September 2017.

Since then, the price has never again moved as high as the 252p or so it hit and today languishes close to 171p. If you look at the share price chart, the action has been essentially sideways since the autumn of 2017, albeit with some big swings along the way.

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Meanwhile, the record of growth in earnings looks like this through the period:

Year to February

2016

2017

2018

2019

2020

Growth in earnings per share

34%

87%

32%

46% (e)

26% (e)

Although the share price has paused in its uptrend, City analysts following the firm still expect earnings to shoot higher through 2019 and into 2020. In many situations with other companies, growth in earnings around 26% would be received as good news and send many share prices rocketing up.

Growth versus sentiment

But I think Boohoo’s share price was previously well up with events. I punched out an article last October when the historic price-to-earnings (P/E) ratio was near 90. I said then that the valuation meant “the stakes are high, and any slip in earnings will bring a sharp share-price reversal.”  Today, the historic P/E rating is near 43, due to a fall in the share price and another year of growing earnings.

However, 40-plus is still a high valuation, and looking at analysts’ forecasts, the rate of forward-looking growth in earnings could be beginning to slide. That’s natural, of course. No fast-expanding business can keep up its initial growth spurt. As enterprises become larger, it hard to keep up those early impressive growth percentages. Although earnings often continue to rise, the rate of advancement tends to settle into a more sedate pace.

That’s a problem for those holding shares in Boohoo now, I reckon. Because if the rate of earnings growth does ease back, the P/E rating will likely decline too, and that process could take years to unfold. An ongoing valuation derating like that could act to keep the share price pegged where it is now, give or take a bit.

Opportunity and risk for investors

But if you do keep holding through all this, there’s little to keep you interested because the firm pays no dividend. Meanwhile, I believe the fast gains in the share price are all behind us and we are unlikely to see them again. The conundrum is that if the derating continues to unfold, the valuation will look more and more attractive. But there’s also downside risk to holding, as my Foolish colleague Rupert Hargreaves pointed out recently.

In a recent trading update, joint chief executives Mahmud Kamani and Carol Kane said: “The global growth opportunity is significant and we will be addressing it in a controlled way.” Indeed, I think the firm has every chance of succeeding over time. But I don’t believe there’s any hurry to hop aboard this growth story now, and If I’d been holding through the past few years I’d bank most of my profits and let a small position ride to see what happens.

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Kevin Godbold has no position in any share 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.

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