The Boohoo share price has fallen 20% in 2018. Will it bounce back in 2019?

Boohoo Group plc (LON:BOO) shares have fallen on fears of a retail slowdown. Roland Head asks if investors should be buying.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Last week’s shock profit warning from ASOS hit the price of online rival Boohoo Group (LSE: BOO) as well.

In response, Boohoo rushed out a statement reporting record Black Friday sales. Management said that profits should be in line with existing City forecasts. But despite this reassurance, Boohoo’s share price is down by 20% so far this year.

If Boohoo can continue to outperform ASOS, then this could be a buying opportunity.

Is Boohoo better than ASOS?

Boohoo and ASOS seem similar at first glance, but there are some big differences. The first is that Boohoo only sells its own products. These are sold under three brands, Boohoo, PrettyLittleThing and Nasty Gal.

By focusing on own-brand sales, management has direct control over the style, price and quality of the products. It is also able to build a valued brand which customers seek out.

I think this is one reason why Boohoo is more profitable than ASOS. Boohoo generated an operating margin of 6.6% over the 12 months to 31 August. For ASOS, the equivalent figure was 4.2%. Now ASOS is warning that this margin will fall to 2% over the coming year.

My verdict

I’m convinced that Boohoo is a better business than ASOS. But is Boohoo a buy?

After recent falls, BOO shares trade on a 2018/19 forecast price/earnings ratio of 39. Earnings are expected to rise by 22% during the current year and by a similar amount in 2019/20.

This gives the stock a price/earnings growth ratio (PEG) of 2.2, according to my calculations. That’s well above the level of 1.2 often used by growth investors to find undervalued stocks.

For investors with a long-term view, Boohoo may still be worth considering. But in my view the shares still look quite fully priced. I’d rate Boohoo as a hold, but I think there are better options elsewhere.

A real buying opportunity?

One stock that’s come onto my radar after recent falls is software group Craneware (LSE: CRW).

This £575m company produces software used in US hospitals. Craneware says that its products help to maximise revenue, control costs and ensure compliance. It’s not hard to see how valuable this could be, given that most American hospitals are privately run.

The Craneware share price has fallen by 35% since mid-September, thanks to the widespread market sell-off. In reality, I think the share price had run ahead of itself at more than £35. But I’m more interested in the stock at its current level of around £22.50.

Very profitable

You see, this is an extremely profitable business. Not only are profit margins high, at about 28%, but Craneware’s customers are generally quite ‘sticky’. Once the firm’s systems are embedded into a hospital’s processes, it’s hard to change to another supplier.

The firm earns revenue through multi-year contracts to supply and support its software. This means that forward earnings are generally very predictable.

Earnings per share have grown by an average of 14% per year since 2014, and this rate of growth is expected to continue. The dividend yield is modest at just 1.3%, but the payout has grown by nearly 13% per year, providing attractive income growth.

As with Boohoo, Craneware shares look fully priced on 39 times forecast earnings. But in my view this is a much better quality business with more robust profits. I’d consider buying these shares at current levels.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. The Motley Fool UK has recommended boohoo group and Craneware. 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.

More on Investing Articles

Young black man looking at phone while on the London Overground
Value Shares

After a 16% drop, FTSE 100 stock JD Sports Fashion looks like a steal to me

This FTSE 100 stock has tanked since mid-September. Edward Sheldon believes that there's value on offer after the share price…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Is now the time to buy BP shares? Here’s what the charts say

The best time to buy shares in a company is when they’re trading at a discount. But the future is…

Read more »

Investing Articles

Here’s how I’d use £50K to aim for a million when the stock market crashes

Seeing a stock market crash as a buying opportunity could prove lucrative for a well-prepared, long-term investor. Christopher Ruane explains…

Read more »

Stack of one pound coins falling over
Investing Articles

It’s up 27% with a P/E of 9! I’m considering the potential of this blossoming penny stock

Despite several years of losses, this UK penny stock has an impressive valuation. I’m looking to see if it could…

Read more »

US Stock

The Nvidia share price falls! Here’s what I think happens next for the S&P 500

Jon Smith reviews the overnight results from Nvidia and explains why this could stall the S&P 500 performance through to…

Read more »

Investing Articles

Down 15% today, is this FTSE 100 share too cheap for me to miss?

JD Sports' share price has tanked after the FTSE 100 share released another profit warning. Is this the opportunity I've…

Read more »

Investing Articles

Up 8% today, is this FTSE 100 growth stock a slam-dunk buy for me?

Halma's share price is soaring thanks to another headline-grabbing trading update. Is the FTSE 100 stock now too good for…

Read more »

Investing Articles

With a P/E ratio of just 10.5 is now a brilliant time to buy a cut-price FTSE 250 tracker?

Harvey Jones says a recent dip in the FTSE 250 leaves the index trading at bargain levels. One stock in…

Read more »