I listen to short sellers. They have a vested interest of course, but generally they know what they are taking about. This is why I was worried earlier this weak, when short seller Shadowfall accused Boohoo (LSE: BOO) of misrepresenting its purchase of PrettyLittleThing.
As I said, these kind of accusations need to be taken in context. Before short sellers warn the rest of the market about problems, they take out their own positions. They will benefit massively if the share price goes down.
Short selling is when a company or individual borrows shares and sells them to the market. At some point they will have to buy them back. If the share price has gone down, they can buy them back cheaper than they sold them and profit from the difference.
These accusations said that Boohoo inflated its cash flow and played down the eventual cost of its stake in PrettyLittleThing. A few days later, Boohoo completed the purchase. In essence this proves aspects of the Shadowfall report wrong.
The short seller said the complexities of the deal could mean Boohoo would have to pay nearly £1bn for PrettyLittleThing. Under the terms of the deal, however, Boohoo will now pay about £270m initially, followed by £54m as long as its share price averages 491p over any six-month period between completion and March 2024.
To a certain extent then, the Shadowfall report can be seen to have only a short-lived effect. The Boohoo share price, which didn’t lose much ground anyway, is currently trading near all-time highs.
It’s also worth noting that the accusations themselves were not as damning as we have seen about other companies from short sellers like Muddy Waters.
Too high to buy?
The problem for me with Boohoo at the moment is that I think the share price is just too high for it to be attractive. It has a forward price-to-earnings ratio of 60. Of course these levels are only high depending on what the price does in the future, and there is potential for more upside.
Unlike many fashion retailers, Boohoo has been fairing well during lockdown. As bricks and mortar stores reopen its business may take a hit, but somehow I doubt it.
As with rival ASOS, the majority of Boohoo customers are young and trendy. So much so they kept buying clothes even during lockdown.
Meanwhile its attitude towards investment seems like a sensible plan to me. For a business that buys distressed fashion brands cheaply, we may be entering a period of opportunity.
As I said, near record highs is just too expensive for me at the moment. I will certainly be waiting for a dip though.
Karl 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.