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Forget the Boohoo share price, I think this fallen growth stock could be set to rebound

I’ve been inventing new investment rules for myself. One is inspired by the number of companies hitting slumps which seem to go on for a lot longer than they used to, and that’s to never buy into a recovery stock until after it’s recovered.

Another I’m pondering is never buy a growth stock until after the share price has crashed at least once. That one’s partly from seeing Luceco (LSE: LUCE) shares among the biggest risers Monday morning and then, when I looked closer, I saw it’s an earlier growth darling whose share price had suffered a massive crash.

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Rocky road

After flotation in October 2016, things started off swimmingly well for the LED lighting innovator and the share price soared. But a profit warning in December 2017 revealed its outlook had been based on a stock valuation error leading to the financial controller’s resignation. Some £3.5m was knocked off guidance for second-half profit and the share price went through the floor.

For the next 12 months, the price continued to slide until it dropped to 75% lower than its flotation level, before 2019 brought the start of a strong recovery. Though 2018 saw a collapse in pre-tax profit, the firm is forecast to come bouncing back this year, putting the shares on a P/E of 15, dropping to 13 in 2020.

My recovery rule counts here too, of course, and I’ll at least want to see how this year’s first-half figures turn out, But I think we could very well be at the start of a sustainable growth phase.

Multiple crashes

Whenever I look at the Boohoo Group (LSE: BOO) share price, my first though is to wonder when the next boom and bust is going to happen. It’s not that I don’t think it’s a good company. I do, and I think it’s been managing its expansion better than market trailblazer ASOS did that bit earlier.

The ASOS share price has soared and crashed massively. Twice. And today, it’s about the same level it was in late 2012, and 65% down from its peak in early 2018.

Boohoo hasn’t been on quite such a dramatic journey. But we’ve had one big slump since the shares peaked in June 2017, followed by a series of less-dramatic ups and downs and, at 212p, the shares are at a relatively modest loss of 20% from their peak.

Valuation

The big problem for me is I have no clue where the Boohoo share price will be going over the next few years. Now that shouldn’t matter at all for a long-term investor, which I am, but it’s not that simple.

I’ve seen many highly-valued companies over the years, ones which I really had no way of valuing at the time I examined them. Some turned out well, saw their earnings rise inexorably and wipe out massive early P/E multiples. But others never quite got there — they turned out to be great companies but not great value, and their share prices were still down a decade later.

That’s the key thing — there’s no company so good it’s worth buying at any price. Boohoo, on a forward P/E of 43, might justify the optimism. But I just can’t work out if it’s good value, so I’m staying away.

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Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. 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.