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3 reasons why I think the Boohoo share price is undervalued right now

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If you take a look at most firms’ share price movement for 2020, one thing will stand out. For the vast majority, March brought a large dip in the share price. This was due to the impact of the pandemic, and the rush of investors to sell out of stocks and go into safe havens. Yet for the Boohoo Group (LSE: BOO) share price, you’ll see two large dips this year.

The first was in March, when the pandemic really gripped the nation. The second was in July, when allegations of poor working conditions surfaced. Since both occasions, the share price has rallied, but is still currently comfortably below levels seen earlier this year. In my opinion, this means the stock is undervalued, for several reasons.

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3 reasons Boohoo could be worth more

First up are the recent acquisitions Boohoo has undertaken. Already in 2020, the firm has snapped up the chunk of PrettyLittleThing it didn’t already own, as well as Oasis and Warehouse. There were also rumours of a potential acquisition of New Look, which didn’t happen. But the rumours shone the spotlight on Boohoo’s opportunity-ready war chest. The strategy of fashion brands should boost long-term economies of scale for Boohoo. Given the challenges some fashion retailers face, further buys could be at bargain prices. Such discounted acquisitions should increase the overall value of the group (and the Boohoo share price).

Next up is the independent report of alleged poor working conditions of suppliers in Leicester. This was the cause of the second sell-off in July. The Boohoo share price needs to rally another 26% to get back to levels seen before the news broke. Understandably, this is a cloud hanging over the share price. When the report is released, investors will have clarity on the situation and can move forward. I doubt the findings will be serious enough to warrant more than a 26% hit to the share price in the longer run, so I see the share price undervalued from this angle.

The latest trading results we had were looking at Q1, with the next major update being at the end of September. But if we look at ASOS, with a similar online-only business model, the results should be in line. As an example, revenue in the four months to the end of June was up 9% for ASOS. If you agree with me that its online fast fashion model means Boohoo is likely to have done well too, then results at the end of the month should be positive. Working backwards, this would lead me to want to buy the stock now, viewing it as undervalued with the imminent results on the horizon.

Getting the timing right on the Boohoo share price

Most of the above reasons are short-term drivers. Yet they all have longer-term implications. For example, the earnings report could offer a short-term boost to the Boohoo share price. This should support a strong close to the year for financial performance. This then has a knock-on impact of starting 2021 in a stronger position. So from my view, I’d be wanting to buy the stock now, to take advantage of both time frames.

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jonathansmith1 has no position in any of the shares mentioned. The Motley Fool UK has recommended ASOS and 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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