Boohoo (LSE: BOO) shares have fallen 40% in the space of just a month. Warren Buffett has famously advised investors to “be greedy when others are fearful.” So, after the precipitous fall in the Boohoo share price, would he buy, sell, or hold the stock today?
On the face of it, the answer seems straightforward. Buy! However, before you jump in with both feet, I think it’s worth considering whether, in Boohoo’s case, some of the great man’s other musings trump his “be greedy” tip.
The Boohoo share price collapse
As recently as 17 June, Boohoo’s shares were trading at a new all-time high price of 415p. As I’m writing they’re trading around 245p.
The slump followed a Sunday Times article on 5 July. It reported on an undercover investigation that found workers in Leicester, making clothes destined for Boohoo-owned brand Nasty Gal, were being paid as little as £3.50 an hour.
Boohoo claimed to be “shocked and appalled” by the allegations. It announced it was launching an independent review of its UK supply chain, led by Alison Levitt QC. However, further media coverage and probing highlighted how Leicester’s rag trade ‘dark factories’ had been an open secret for years. And the Boohoo share price has remained depressed.
Last week, in a report titled ‘Boohoo’s reputation craters after modern slavery allegations’, YouGov published its BrandIndex charts showing the scale of the damage done to the firm’s reputation.
Warren Buffett and reputation
Buffett puts great store in the reputation of a company and integrity of its managers. Testifying before Congress in 1991, regarding a scandal rocking investment bank Saloman Brothers in which he owned shares, he said: “Lose money for my firm and I will be understanding; lose a shred of reputation for the firm, and I will be ruthless.”
Going by this stance, far from being greedy and buying Boohoo stock, Buffett would sell it in a flash. However, if we look a little further, we find his position isn’t quite as clear-cut as he stated it in 1991.
Cockroaches in the kitchen
Buffett sold his holding in Tesco after a string of damaging issues — including a cooking-the-books scandal — emerged during 2014. His regret was he didn’t sell as quickly as he might have done. He chastened himself, saying: “You see a cockroach in your kitchen; as the days go by, you meet his relatives.”
Buffett used the cockroach analogy again in 2016 when a fake-accounts scandal emerged at one of his biggest investments, Wells Fargo. However, in this instance, he held on to his shares. The bank’s name was increasingly dragged through the mud, as more cockroaches appeared. Yet Buffett continued to hold, and retains a substantial stake in the business to this day.
Here’s what I’d do about the Boohoo share price. If we avoid cherry-picking from Buffett’s words of wisdom, it seems there’s no clear-cut answer to the question of whether he’d buy, sell, or hold Boohoo shares. Personally, I’m watching the stock until management announces the terms of reference for the QC’s independent review.
The terms are due to be announced by the end of the month. How wide or narrow they’re set should give us an idea of how open the company is to having its supply chain investigated. And how serious Boohoo is about resolving any issues discovered.
