Boohoo share price has drifted back: The contrarian case

The remarkable Boohoo (LON: BOO) share price comeback has faded amid rising concerns about the company’s growth and profitability. The stock rose to a high of 51.78p on Monday, which was ~56% above the lowest point in 2023. 

The previous prediction was right

I wrote about Boohoo stock on January 12th and delivered which turned out to be a relatively accurate prediction. At the time, I wrote that the shares would rise to about 55p as investors buy the dip after the remarkable collapse of 2022. The stock’s reversal this week happened just a few points below the margin of error.

Boohoo’s management is implementing a turnaround hoping that the company will move back to growth again. This strategy includes reducing inventories, improving working conditions in its factories, and reducing the amount of returns. 

Macro factors are supportive of Boohoo. For one, as I wrote in this report, UK’s inflation has dropped in the past three months. Headline consumer inflation dropped to -0.4% in January while core CPI fell oto -0.9%. 

While annualized inflation is stubbornly high, it seems like trends are encouraging. Further, a note by Bloomberg said that Rishi Sunak was working to repair the relationship between the UK and the European Union. 

Further, data shows that shipping costs are falling as global demand wanes. Ocean freight shipping prices have dropped to the lowest level since 2020. As shown below, the Freightos Baltic Index stands at $2,005, down from the pandemic-era high of over $10,000. This is important for Boohoo because of how integrated supply chains are. Additionally, Boohoo is taking measures to reduce its costs and boost profitability.

Feight costs

Is Boohoo a good stock to buy?

To be clear. Boohoo is still going through a tumultuous period as demand for its products wanes. In fact, in its most recent statement, the management reiterated that its revenue for the current financial year that ends this month will drop by about 12%. Its adjusted EBITDA of 3.5% is also not all that good.

However, some analysts believe that Boohoo has become an outright bargain that is valued at about 591 million pounds. Those at Berenberg Bank and Bank of America have a buy rating on the stock. Their case is that Boohoo is still a good company that is a well-known brand. As such, it could even be scooped by a private equity company seeking to grow its brand.

Another catalyst is the fact that UK’s unemployment rate remains at 3.4% while many high street retailers are not doing well. Therefore, many shoppers will likely continue shopping online, where Boohoo has a strong market share.

And website traffic numbers are encouraging. According to Similarweb, the company’s website had over 18.6 million visitors in January, down by 11% from December. This seasonal decline was expected since January is usually not a good shopping month after the holidays.

BOO stock chart by TradingView

On the 4H chart, Boohoo share price has been in a slow bullish trend. It has formed what looks like a rising wedge that is shown in black. In price action, this pattern is usually a bearish sign. It also seems like it has formed a small double-top pattern. Therefore, while the fundamentals are supportive, Boohoo is only a good buy if buyers manage to push it above the resistance at 51.48p. If this happens, the shares will rise to 56.92p.

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