For several years, the Boohoo (LSE: BOO) share price was the hot topic for AIM investors. The growth of the fashion company since its founding in 2006 has been dramatic. And the share price had gained over 1,000% over the past five years. It even managed to rally from the stock market crash in March to post fresh year-to-date highs just a couple of weeks ago.
Unfortunately, recent news has seen the share price halving at one point since the start of the month. In short, an undercover Sunday Times reporter discovered that a supplier in Leicester had very poor working conditions. Not only this, but it claimed the workers were being paid much less than minimum wage. Boohoo has announced an internal investigation into this, but has already come out and said that the revelations are “totally unacceptable”.
Serious, but not critical
For me, the Boohoo share price slump (to 198p at the lowest but to 231p at time of writing) could make it the buy of the decade for my ISA. I’d use the Stocks and Shares ISA to shelter potential profits from capital gains tax.
Firstly, the news is reputational, not financial. If the news story was concerning accounting fraud, missing assets or a significant revision in forecasts for revenue, I’d be worried. These kind of stories have the potential to put a share price down to zero. But a reputational damage story (which is what this boils down to) is unlikely to render a firm worthless. Sure, it’s a terrible situation and deserves an investigation, but robust action on the group’s part should help it recover. The Boohoo share price is now close to halving since the start of the month, which for me is more than enough of a slump to account for the potential damage from this event.
Secondly, the market always overshoots with any reaction. We see this time and time again, with fear and greed pushing investors into making irrational decisions. During the stock market sell-off in March, we saw reputable FTSE 100 firms lose 20-30% in value. This was despite the business models being sound, and this was proven with a rally in the prices when the dust settled.
I believe this is the same for the Boohoo share price. A close-to-50% fall in just over a week seems like an overreaction from a technical point of view. The relative strength index (RSI) for the stock sits at just 14. The RSI measures how overbought or oversold a stock is. It ranges between 0 and 100, with anything above 70 being overbought and below 30 oversold. The 14 reading is the lowest since the bottom of the March sell-off. Beyond this, you’d have to go back to 2015 to find a time when it was this oversold from a technical point of view.
The Boohoo share price: I’d buy now
If we park the Boohoo share price to one side, my final reason for buying it is purely fundamental. It’s a low-cost clothing firm, which suits the economic situation at the moment. People are unlikely to spend lots on designer clothes at present. Add into this the brand loyalty and lifestyle association for young women with PrettyLittleThing and Nasty Gal, and I think demand overall will remain strong. So I’d be buying the stock now as an amazing long-term buy, and housing it within my ISA.
The post 3 reasons why the Boohoo share price could be the buy of the decade for my ISA appeared first on The Motley Fool UK.
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Jonathan Smith does not own shares in any firm 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.
Motley Fool UK 2020