The Boohoo (LSE: BOO) share price staged a dramatic bounce-back from its coronavirus lows of the spring to exceed its February level. Indeed, by mid-June, the stock was around 430p, whereas in February before the crisis hit the markets, it had topped-out above 325p.
Earnings surged because the firm’s online offering appealed to customers in lockdown. But the stock market euphoria around the share suffered a blow in July. Allegations emerged that the company was involved with contactors using illegal working practices and underpaid labour in Leicester.
Why the Boohoo share price makes the stock a ‘buy’ for me
Boohoo’s been trading with a high earnings multiple for a long time because of its big growth rates. But investors in stocks with a rich valuation do tend to become jittery if something seems amiss. The accusations were enough to sink the stock again, and by mid-July, it was back down close to 200p.
But the directors moved fast to launch an independent review of its Leicester supply chain led by Alison Levitt QC. And the company pledged to “act decisively” on the independent review’s findings and aims to embed its recommendations into the firm’s strategic planning. The directors sounded confident at the time, saying in the update announcing the measure that it would “help restore confidence in the Leicester garment industry and increase transparency for all of our stakeholders.”
On top of that, the directors put their own money on the line by buying sizeable chunks of shares near the lows caused by the allegations. It was enough to restore confidence among many investors and the share price started shooting up again. As I write, it stands near 320p but has been consolidating near that level for around a month.
And consolidation is a good thing after a rapid rise. Often, the forces of supply and demand for shares must battle it out for a while before a stock moves higher. And consolidations are well-known for producing the eventual ‘break-out’ that many investors and traders look for.
News will arrive soon
Meanwhile, Boohoo expects to provide an update on the findings of the independent report with its half-year results announcement on 30 September. My guess is we won’t be seeing the unveiling of a smoking gun for Boohoo. Such things tend to leak out and reflect in share-price action before the event. To me, the most likely outcome is the report will catalyse the next move up for the shares.
And why not? The stock is still around 25% below its all-time high. And City analysts following the firm have pencilled in robust double-digit percentage increases in earnings for the current year and the following year to February 2022. Indeed, Boohoo’s trading is very far from losing its mojo. And without the whiff of scandal around the business, the stock would likely be higher. Meanwhile, the forward-looking earnings multiple is around 33, which isn’t outrageous for a high-growth proposition.
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.