Boohoo (LSE: BOO) has been one of the winners in the FTSE 100 crash. As the Covid-19 lockdown has closed all UK clothing stores, online sellers have been enjoying a boost in demand. I was surprised then, to see the Boohoo share price fall this week.
From a high on Tuesday of 380p to the end of business on Wednesday, Boohoo shares lost 12% of their value. Things have reversed on Thursday, and the price has bounced back with a 17% gain, at the time of writing. But what’s been happening, and is this price uncertainty providing us with a buying opportunity?
Boohoo share price
We’re too late to take advantage of this week’s dip. As it stands, the Boohoo share price is now up 30%, so far, in 2020. But that alone doesn’t mean we should turn away.
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The price fall came as a result of a short-selling attack on the company. Fortunately, it’s not from Muddy Waters, as an attack from that renowned company can be enough to crush a stock. Muddy Waters attacked NMC Health earlier in the year, accusing it of balance sheet manipulation and inflated asset purchases, among other misdeeds. The resulting exposure of the firm’s finances, and those of founder BR Shetty, have led to a share price collapse and the cancellation of NMC’s London listing. And it’s brought about the financial downfall of Shetty too.
Cashflow questions
In the Boohoo case, the attacker is the UK’s Shadowfall, which has accused Boohoo of presenting a “misleading impression” of its cashflow. Shadowfall alleges an overstatement of £32.2m. But it certainly hasn’t had the same effect on the Boohoo share price as the Muddy Waters attack on NMC.
One of Shadowfall’s claims is that Boohoo treated subsidiary PrettyLittleThing as a wholly-owned investment when it actually owned 66%. Boohoo’s rapid response, on Thursday, was to announce the acquisition of the remaining 34%. There’s an initial consideration of £269.8m, potentially rising to £323.8m. Boohoo said: “The acquisition is expected to be significantly earnings enhancing on a fully diluted basis with immediate effect.” That announcement was just what the Boohoo share price needed.
Prior to that, Boohoo had issued a note of its own saying it “strongly refutes the allegations made in the research note.” The company went on to point out that its annual results contain “clear definitions, alongside a full reconciliation down to net cash flow for the financial year.” It also explained it had an option to acquire the remaining 34% minority shareholding in PrettyLittleThing.
Buy or sell?
What does all this mean for shareholders, and is the Boohoo share price attractive? I think it’s unlikely there’ll be much substance coming from this short selling note. I see Boohoo shrugging it off and carrying on with business as usual.
I think it’s a good business too, and I expect profitable expansion in the years to come. The only thing I don’t like is the Boohoo share price valuation. On a forward P/E for the current year of a massive 60, I see no safety margin there at all.
I wish you well if you’re a growth share investor, but it’s still too risky for me.
