The FTSE 100 has provided handsome gains for 2021, up nearly 10% for the year. This rise, driven by the oil and travel sector, is in response to prospects of a solid economic recovery and better than expected vaccine rollouts. In my opinion, this rise has caused the FTSE 100 to become overheated and makes a minor correction likely. For this reason, I am reluctant to add to my FTSE 100 position right now. So instead, I have decided to add to my favourite UK growth stock, which is still cheap.
A global clothing brand
Boohoo (LSE: BOO) has been a long-standing favourite for me after buying the stock in March 2020. Since buying, the shares have risen over 40%. With a current share price of £260 and average analysts’ price target of £350, there is 34% upside potential for investors.
In my opinion, Boohoo is the perfect growth stock to add to my portfolio. 2020 was a brilliant year for the company, with active customers growing 28%, hitting 18 million. This increased traffic translated to a 41% growth in revenue, led by international revenue up 44% year on year.
2021 is expected to be another breakthrough year for the company. Management expects revenue growth to be between 36% to 38% and adjusted EBITDA margin to stay at 10%. The high predicted growth rate of 38% makes the price-to-earnings ratio of 36 look like a bargain.
This growth will be driven by the new companies acquired over the Covid pandemic. For instance, in February 2021, the company acquired Debenhams for £55 million. Boohoo will add this to its portfolio of 13 clothing brands. With such a diverse portfolio, there will be plenty of growth opportunities for the group to explore in the future.
But this growth stock is not without its problems. In 2020, a supplier for the company got investigated on slave labour allegations at its Leicester factory. The management responded swiftly to the issue by starting a full investigation, where hundreds of suppliers got sacked. Although they have successfully dealt with the problem, the investigation is still in the public eye, and new news on the issue is always possible.
There is also a risk that when society returns to normal, consumers will leave Boohoo to go to brick-and-mortar shops like Primark. If true, Boohoo’s top line growth would likely suffer.
Bottom line
Boohoo is a solid growth stock trading at a historically low valuation. Furthermore, its diversified portfolio of reliable companies will likely provide multiple growth opportunities for years to come. But it does have problems that investors should keep a close eye on. I am mainly watching out for new information on the Leicester scandal, which would likely hurt the share price performance.
