The Motley Fool

What could short selling mean for the Boohoo share price?

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.

Accusations

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.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

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.

A Top Share with Enormous Growth Potential

Savvy investors like you won’t want to miss out on this timely opportunity…

Here’s your chance to discover exactly what has got our Motley Fool UK analyst all fired up about this ‘pure-play’ online business (yes, despite the pandemic!).

Not only does this company enjoy a dominant market-leading position…

But its capital-light, highly scalable business model has previously helped it deliver consistently high sales, astounding near-70% margins, and rising shareholder returns … in fact, in 2019 it returned a whopping £150m+ to shareholders in dividends and buybacks!

And here’s the really exciting part…

While COVID-19 may have thrown the company a curveball, management have acted swiftly to ensure this business is as well placed as it can be to ride out the current period of uncertainty… in fact, our analyst believes it should come roaring back to life, just as soon as normal economic activity resumes.

That’s why we think now could be the perfect time for you to start building your own stake in this exceptional business – especially given the shares look to be trading on a fairly undemanding valuation for the year to March 2021.

Click here to claim your copy of this special report now — and we’ll tell you the name of this Top Growth Share… free of charge!

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.