Every investor dreams of stumbling across a multi-bagger but unfortunately, these rare beasts are almost impossible to pin down.
Finding multi-baggers is a hit and miss high-risk game. A huge number of early stage growth companies end up going nowhere or collapsing into bankruptcy leaving investors with nothing — a bad outcome for those hoping for life-changing gains.
Multi-baggers are rare, but they’re not non-existent and when they appear investors rush to get in on the action. This is exactly what has happened with online fashion retailer Boohoo.Com (LSE: BOO) during 2016. Heading into the year, the company’s shares were trading at one of the lowest levels since the firm came to market in early 2014 but after several upbeat trading updates, the market soon changed its view of the firm.
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Year-to-date shares in Boohoo have gained 260% and over the past two years, the shares are up 480%. The question is, can the company repeat this performance next year?
Hard to value
At first glance, Boohoo’s shares look extremely overvalued. At the time of writing the shares are trading at a forward P/E of 60 for the year ending 28 February 2018, which is four-and-a-half times higher than the industry average.
This premium valuation would make sense if the company’s projected earnings per share growth was equal to or greater than the earnings multiple. But it isn’t. City analysts have pencilled-in earnings per share growth of 25% for Boohoo next year giving a PEG ratio of 2.5. A PEG ratio of less than one indicates the shares offer growth at a reasonable price, which isn’t the case for Boohoo.
It looks expensive on almost all metrics, so it’s difficult to assess if the shares actually still offer value or not. What’s more, such a lofty valuation leaves little room for error if the company fails to meet growth expectations.
Boohoo has exceeded expectations for the past year but it has a history of missing market targets. After failing to meet City targets following its initial public offering, shares in Boohoo plunged from an offer price of 80p in early 2014 to a low of 23p before beginning the current rally. The online fashion business is highly competitive and unpredictable, and there’s no guarantee Boohoo won’t slip up again.
I believe a mis-step is the biggest risk for investors going forward. After a near 500% rally from the lows, shares in Boohoo could quickly re-rate lower to a more suitable valuation if the company lowers its outlook. A valuation more suited to Boohoo’s growth of around 30 times estimated 2018 earnings could see the shares fall back to 70p
Conclusion
So overall, it looks unlikely that Boohoo will rise another 300% during 2017. If anything, the shares are more likely to lurch lower as the firm’s current valuation looks too rich, even for a high growth online retailer.
