I’m wary of growth shares when they’re in the early can-do-no-wrong phase. That’s when investors pile in and push the price astronomically high. And those early soaraway flights usually tend to fall back before long. I think Boohoo (LSE: BOO) largely avoided that, though the Boohoo share price has still had its ups and downs.
Investors probably learned after so many were burned by the ASOS boom and bust. ASOS got caught in the growth headlights, and its shareholders had one of the most volatile white-knuckle rides I’ve seen in some time. But the Boohoo journey has been more relaxed.
Boohoo has, however, been rocky in 2020. It regained its early Covid-19 loss pretty quickly and soared ahead. But then in July, allegations that some workers at a supplier in Leicester were earning as little as £3.50 per hour sent the price reeling.
Boohoo share price crash
The Boohoo share price lost half its value in just three days. An overreaction? I reckon so. But it’s a great example of the radical swings that can hit a popular growth share. And it shows how canny investors can step in when markets are panicking. From July’s low, Boohoo shares are already up 70%, and that’s the quick profit you could have made by going against the prevailing emotion.
Boohoo said it was “shocked and appalled by the recent allegations that have been made and we are committed to doing everything in our power to rebuild the reputation of the textile manufacturing industry in Leicester“. The company launched an independent review of its supply chain.
We had the results of the review on Friday, and it’s looking as comforting as I expected. After conducting the review, Alison Levitt QC reported said she is “satisfied that Boohoo did not deliberately allow poor conditions and low pay to exist within its supply chain, it did not intentionally profit from them and its business model is not founded on exploiting workers in Leicester.”
The Boohoo share price gained 10% in response, on the morning of the report’s release.
The review did identify “many failings in the Leicester supply chain“. But it also pointed out that Boohoo was in the process of rectifying those failings even before July’s news broke. That process, however, “did not advance quickly enough“.
For me, the publication of the review should put this problem where it belongs. It’s a one-off, it wouldn’t have been a long-term issue anyway, and Boohoo shareholders can get back to thinking about Boohoo share price growth.
Boohoo shares are on a P/E of around 40. But that would drop to 32 on the following year’s forecasts.
To put that into perspective, at the end of the 2016-17 year, Boohoo shares were on a trailing P/E of nearly 70. That’s come down a lot, even though the share price is higher now. It’s because EPS will have more than trebled by the end of this year if current forecasts are accurate.
I doubt we’ll see another trebling in the next four years. But I think we’ll see enough to make the Boohoo share price look cheap now.
Alan Oscroft 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.