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Boohoo share price just dropped 20% in a day. Here’s what I’d do now

Harshil Patel
·3-min read
Businessman looking at a red arrow crashing through the floor
Businessman looking at a red arrow crashing through the floor

The boohoo group (LSE:BOO) share price dropped around 20% in a day after news surrounding the company’s auditors. The media reported that the accounting giant PwC has signalled its intention to quit as Boohoo’s auditor. In response, on Monday, Boohoo released a statement saying that PwC remains its auditor at this time but it has recently launched a tender process to find a new auditor.

It’s unclear to me which came first. The reasons behind the decisions are also currently unknown. Speculation surrounding the details caused a sharp drop in the Boohoo share price on Monday. Investors tend not to like uncertainty, so the Boohoo share price reaction doesn’t surprise me.

Until there is further clarity, sentiment is likely to remain dented. In my opinion, the Boohoo share price could remain under some pressure in the short term.

Separately, the Sunday Times reported that the National Crime Agency is investigating companies that supply Boohoo, over suspicions of money laundering and VAT fraud. Although there seem to be no links to the company, apart from being suppliers, it could be adding to negative sentiment caused elsewhere.

Boohoo’s share price struggles

The Boohoo share price is down by over 15% so far this year. However, it’s been a volatile year for Boohoo investors, and has included significant gains and falls. In a Covid-19-related, market-induced panic in March, the Boohoo share price fell from 300p at the start of the year to a low of around 135p.

It then recovered those losses and went onto triple by the summer, reaching a high of over 400p. Then, in July, allegations surrounding suppliers in its supply chain using underpaid staff and unsafe working conditions in Leicester caused further investor panic, causing Boohoo’s share price to drop by 50% to a low of approximately 200p.

It then once again reached highs of 400p. It has definitely been a year of ups and downs for the Boohoo share price. Today, at the time of writing, shares are trading 20% down on the day, at around 255p. This recent share price weakness adds to what has been a volatile year for Boohoo investors.

Does it matter for long term investors?

In a word, no. Boohoo is fundamentally strong and thriving, in my opinion. It continues to grow its earnings and market share. Its online business model drives market-leading profit margins. Its expansion of brands drives earnings growth. With an entrepreneurial foundation, it manages to stay ambitious.

Long-term investors have much to look forward to from this popular online clothes retailer. With a price-to-earnings ratio of 33 and earnings growth of 36%, it does not look particularly expensive. I also like that it has a return on capital of 27% and net cash on its balance sheet.

I reckon this business could be significantly larger in the coming years, and I wouldn’t be surprised to see the Boohoo share price above 400p in 2021. The concerns that caused share price volatility this year could all be viewed as noise if you take a long-term view.

So, would I buy more shares now on the recent share price weakness? My current thoughts are, not yet. I am somewhat concerned about the details surrounding the auditor and would rather wait for further clarity. I won’t be selling my shares either. I hold a relatively small amount of Boohoo shares, and will likely keep them as the long-term investment I initially bought them for.

The post Boohoo share price just dropped 20% in a day. Here’s what I’d do now appeared first on The Motley Fool UK.

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Harshil Patel owns shares in boohoo group. 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