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The boohoo share price just climbed 30% in one day. Would I keep on buying?

Stuart Blair
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It’s been a turbulent few days for the boohoo (LSE: BOO) share price. When a Sunday Times investigation uncovered poor working conditions and low pay at a supplier’s Leicester factories, shares fell by 46% in just two days. Yesterday, its share price then rose by 30% to 286p. Nevertheless, this is still a 30% decrease from its recent high, and I believe that it could offer an opportunity to buy the popular growth stock.

The boohoo share price has seen consistent growth

From its IPO in 2014, the boohoo share price has risen from 50p to its recent high of 413p. When looking at the figures, it’s hardly surprising. Earnings in 2014 totalled just over £8m, whereas earnings last year reached £64m. This growth has mainly been brought about by strong consumer demand, and a large range of cheap clothes. The clothing firm has also thrived throughout the coronavirus pandemic, especially as its high street rivals have been unable to trade.  It has also expanded internationally and made a number of popular acquisitions, including Pretty Little Thing and Nasty Gal. Expansion into the US has seen tremendous growth, with first quarter revenues there up 83%. As such, future growth seems imminent, and this should further increase the boohoo share price. 

How much of a worry is the recent news?

News of poor working standards should obviously be taken very seriously, especially if this is a widespread issue. In fact, for boohoo, its business rests on buying its clothes at such cheap prices, so that operating margins can stay high.

Any negative backlash against the brand would also have severe consequences, especially because it relies heavily on celebrities promoting its products. In a world where fast fashion is already in the spotlight for environmental concerns, any disrepute brought upon the brand could have long-lasting ramifications. As such, it’s not surprising that the boohoo share price has fallen so significantly this week.

But I do still think that the market may have overreacted to the news. Firstly, boohoo has isolated themselves from the factory in question, and has already pledged to invest in improving factory conditions. With £350m of net cash, and just £20m of debt, the firm is in a very strong position to achieve this. In addition, the recent news seems to be an isolated event, in that there is no evidence of a widespread problem. This means that I cannot see the consequences being long-lasting. This explains the 30% share price rise yesterday, and I believe this rally should continue.

Would I buy boohoo shares?

Personally, I believe that the recent drop in the boohoo share price has led to a fantastic buying opportunity. This is reiterated by many investment firms. Many hedge funds who had shorted the stock have now closed their positions. With a price-to-earnings ratio of around 36, the boohoo share price cannot be classed as cheap. But after its recent fall, and considering the opportunity for future growth, I would not hesitate in buying boohoo shares today.

The post The boohoo share price just climbed 30% in one day. Would I keep on buying? appeared first on The Motley Fool UK.

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Stuart Blair has no position in any of the shares 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