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Why the Boohoo share price could crush the FTSE 100

Peter Stephens

The last three months have been hugely positive for Boohoo (LSE: BOO). The online fashion retailer has seen its share price rise by 25%, which is well ahead of the FTSE 100’s 8% gain during the same time period.

Within that period, the company has delivered results in line with its expectations, while continued growth looks to be ahead. As a result, it has the potential to beat the UK’s main index alongside a growth stock which reported upbeat results on Wednesday.

Simple strategy

Boohoo’s strategy is relatively simple. However, as is often the case in business, a simple strategy which is accurately executed can lead to significant financial rewards. The company has been able to deliver innovative fashion items at relatively low prices alongside high levels of customer service.

With a solely online footprint, it has also benefitted from cost advantages versus bricks-&-mortar rivals, while the continued transition of shoppers from High Street to online has also provided a tailwind for the business.

Investment outlook

The company’s results released earlier this week showed that it continues to make progress with its strategy. The decision to branch out into new websites seems to be paying off, with the company’s growth rate being exceptionally high. For example, in the current year Boohoo is forecast to post a 16% rise in its bottom line, followed by further growth of 25% next year.

Clearly, buying the stock on an ultra-low valuation would be highly desirable. But given that the FTSE 100 trades close to its record high, the company has a price-to-earnings growth (PEG) ratio of 2. This suggests that while it’s not dirt-cheap, there could be significant growth potential ahead given the positive trading conditions it’s experiencing.

Improving prospects

Of course, there are other shares that could also deliver outperformance of the FTSE 100. One such stock is iron castings and machining group Castings (LSE: CGS). It reported a positive set of results on Wednesday which showed that its foundries have seen an increase in output and improved profitability compared to the previous year.

The company’s investments in robotic handling have boosted productivity, while additional investments are expected to reduce costs yet further. With its order book being solid and schedules increasing, the company appears to have a positive outlook. In fact, in the current year, it’s expected to post a rise in earnings of 27%, followed by further growth of 10% next year.

Despite Castings’ high earnings growth outlook, the company trades on a PEG ratio of 0.6. This suggests that it could offer a wide margin of safety – especially since its strategy seems to be performing well in current market conditions. With a 3.5% dividend yield, which is covered more than twice by profit, its total return could be ahead of the FTSE 100’s future performance.

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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has recommended boohoo.com and Castings. 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.