Boohoo.com BOO Topup Buy Rationale

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THIS IS NOT A TIP. I AM NOT A TIPSTER. PLEASE DO YOUR OWN RESEARCH. PLEASE READ THE DISCLAIMER ON THE HOME PAGE OF MY WEBSITES. IF YOU COPY MY TRADES, YOU WILL PROBABLY LOSE MONEY.

You may have noticed that on Monday 10th August I bought more Boohoo.com BOO via a Spreadbet at 29.32p, equivalent in size to about 1% of my Portfolio Total Exposure. I already had about 1% in them as I bought in initially at about 45p and then at 52p back in September 2014. It was all working out nicely, until they did a Profit Warning and the Stock fell off its Perch.

Once I had stopped crying (geddit?), I did a cold hard assessment of the Stock and I still liked it and decided that there was no need to sell out and it could recover - especially if I helped it on its way with a sneaky ‘Average Down’ (Boo hiss - geddit?).

Back in June this year BOO put out a very positive Trading Update and things are clearly going nicely. This got me alert to the fact that it was now time to look for a Buy Signal to topup my holding and I have been patiently waiting. Anyway, I finally cracked and decided the picture was now good enough to Buy more as the Technical Section below will help show.

Seeing as I am getting fat and lazy these days, I will not do a massively detailed Blog here - just the real meat that Readers like to see. 

Overview
Boohoo.com is a pure Online Fashion Retailer - it has no physical Stores. In this sense, it is very reminiscent of ASOS (ASC), but is much smaller and is specifically focused on aggressively priced Clothes for 16 to 35 years olds and it Sells to over 100 Countries. BOO designs, sources, markets & sells own brand clothing, shoes and accessories.

I like to think of BOO as ‘Primark over the Web’ - and it’s appeal is that it enables young fashionistas to buy ‘throw away’ clothes easily and cheaply. Something that got me interested in the first place was when my Cleaner told me about her young Daughters (aged about 21 and 18) who utterly adore BOO and shop online via their Fones all the time.

The Company Website can be found here:

http://www.boohooplc.com/

The Shopping Website is here:

http://www.boohoo.com/

Key reasons to be bullish on BOO

• I have been painfully aware of how I missed the boat on ASOS when it utterly took off and had an unbelievable run where people who were shrewd (and lucky) enough to hold the Shares made a killing. It strikes me that BOO might be able to copy this growth to some extent and there is a big chunk of money potentially to be made here.
  
• Rare dedicated Online Retailer. BOO is rare in the clothing segment and rare in general with very few Online Retailers and many are crazily overvalued like AO.com (AO.) - I wouldn’t mind BOO getting silly overvalued !!
  
• As per the ‘Valuation’ section below, I was able to buy into the Business at a very attractive P/E Multiple when the potential and already achieved Growth is taken into account - Growth Stories like this are not plentiful. In terms of Relative Valuation, this stock is cheap.
  
• Very nice slow Uptrend on the Chart (this is clear in the ‘Technicals’ section below) - these are the best Uptrends because they are less prone to volatility and huge plunges to the Upside and Downside - nice and steady is how I like it. Indeed, the somewhat surprising lack of Volatility is demonstrated by the very low Margin (Deposit) Requirement that igIndex have on BOO for Leveraged Spreadbetting purposes.
  
• Clear Targets on the Chart - again, this just makes things easier as I like to know what I am aiming at. As a bit of an aside, I have mentioned on Tweets a few times that I like to have high but realistic and justifiable Targets because they help keep me in a Trade. One of the biggest errors I have made many times in the past is to be scared out of Great Stocks by silly rumours and assertions that have no basis in fact - Bulletin Boards are rife with this kind of Noise. I use my Targets to keep me firmly in the Trade and getting the Big Gains. Adding to Positions is vital also and all part of this method.
  
• BooHoo.com is clearly big with the Kids - it seems to be building a strong Brand Loyalty - this is a very important Economic Moat. Look at Supergroup (SGP) to see the power of Branding - in this case via ‘Superdry’.
  
• BOO launches up to 100 new Lines each day and a ‘Collection’ every week - this is impressive stuff but must be very hard to sustain - clearly a positive in many ways but also a Risk that failure to keep up this amazing rate could mean Customers lose interest in the Brand.
  
• Huge Cash Pile derisks the Investment - the business is clearly generating Cash and at some point there has to be the likelihood of a Special Divvy or at least a Progressive Regular Dividend Policy must soon start - again, this happened with Supergroup and boosted the Stock a treat. Failing that, maybe we will see Share Buybacks - wouldn’t hurt.
  
• BOO is quite small and would be an easy Takeover Target for a bigger player - however, the dominance of the Joint CEO would probably make this unlikely.
  
• It seems possible that I could double my Money on this Buy and potentially a bit more. I will be monitoring progress as usual and I will be looking for Information that builds my confidence and enables me to Buy more.
  

Key Risks

• It’s a very competitive industry - things go in and out of fashion extremely fast and new Websites could emerge which become the ‘go to’ site for the kids. BOO seem pretty good at launching new Clothing Lines very fast and this is an important differentiator - although it is an essential ability for any company operating in this space.
  
• Mahmud Kahmani and Carol Kane are the founders (in 2006) and joint Chief Executives  - however, that is all well and good but I get the sense from some comments and anecdotes that Mahmud Kahmani runs it a bit like a personal fiefdom. This may be unfair but it is a sense I get and I do not like this kind of thing. It is something to watch out for in case problems related to this boil up. For instance, his Son runs other Websites which could be seen as competitors - this is not ideal !!
  
• BOO is expanding overseas and clearly has ambitions in this direction - just like ASOS did. However, this brings in Execution Risk and other Risks such as FOREX variations. It is a bit of a double-edged Sword as there are clearly Upside Benefits of successful International Expansion - but it carries Big Risks.
  
• Fashion and Clothing Retail is a very Cyclical Business - if we get another Economic Downturn, the Shares might get whacked. Interest Rates rising significantly would not help this.
  
• Clothing Retailers who source from Abroad often become the subject of Investigations by TV and Newspapers etc. into Unethical and Exploitative Practices in the Factories - this must be a Big Risk for BOO.
  
• Supergroup had problems with Warehousing and Logistics because it could just not keep up with the incredible Volume Growth it was experiencing - BOO runs exactly the same risk, especially as it moves towards more Overseas Sales.
  
• BOO is listed on AIM - this can bring about concerns in itself and a move to the Main Market in the future would be very desirable.
  

Valuation
If you look at the ScreenShot from ShareScope below, in the Top Right Hand Corner you should see ‘Norm EPS (p)’ for ‘Feb 2017 Forecast’ is 1.4p. At my Buy Price of 29.32p, this gives a P/E Ratio of 21. On first glance, this will seem high, but remember there is very high growth here.

However, if you look at the recent ‘Trading Update’ from 10th June 2015, you should see they have Cash of £58m. Against the Market Cap of £326m, this represents 17.8%, so we can effectively reduce the Price I paid by 17.8% to Value the Company appropriately for the Cash Pile.

On this basis, 24p is the right Number to use, and the Forward P/E Ratio for 2017 now works out at 17 (24p divided by 1.4p).

The recent Trading Update had Sales growing at 35%, but from some quick calculations I see that Forecast Pretax Profits are due to grow by 20% (this looks light, which makes me wonder if Management are being quite conservative with their Guidance Numbers after the problems they had shortly after the IPO when they issued the Profit Warning). Nevertheless, a Forward P/E of 17 ex Cash is fairly good value with Profits due to grow at 20%. In terms of a PEG Ratio this is 0.85 - you might recall that a PEG under 1.0 is generally seen as Cheap.

There is no Dividend Forecast but with all that Cash it must be possible that the Company does a Special Dividend or something.

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Targets
In terms of P/E Expansion, it seems possible to me that if BOO can consistently deliver on the Expectations it sets and can sustain a pretty high Growth Rate around 25% ish, a P/E of 25 is justifiable. On this basis, for Next Year 2017, a Target of 40p would be realistic (25 times 1.4p plus the 5p per Share of Cash).

It we go forward a bit, it is not hard in a few years to imagine 2p of EPS (bear in mind that the Forecast number for 2018 is 1.7p, so it wouldn’t take much to hit 2p), on this basis, with a P/E of 25, we get a Target of 55p.

But we could also get a little more excitable - if you look at the extremely high P/E ASOS (ASC) has always commanded (often as high as 80 !!), then maybe a P/E of 30 is possible for BOO. On 2p of EPS, this would give a Target of 65p.

In terms of Chart based Targets, there is a gap to fill which runs up to 40p. After this, 55p would be next in the Sights and the All Time High on the Chart is from when BOO first listed and hit 85p. This is obviously a long way up and if it can get up to these heights then I would be very happy - I suspect this could be some years away though.

Technicals
As ever, let’s start with the Long Term which only actually covers the last 1.5 years or so because BOO has not been listed on the Stockmarket for all that long. As per usual, the Screenshots I have put in this Blog are all from the Evening of Sunday 10th August 2015 which is when I made my Decision to Buy more BOO.

On the Chart below, I have drawn in a Downtrend Line in Black and marked it with a Black Arrow. This forms a sort of Bottom Line for the motion of the Share Price and there is a choice of 2 lines which are arguably both valid to mark a Topline to the Downtrend Channel.

The first Red Line (marked with a Red Arrow) is by far the neater of the 2 options and to be honest it is the one I think is more valid. As you can see, the Red Line has several ‘touches’ of the Price Peaks and it neatly fits parallel to the bottom Black Line.

The other Line is the Blue Line marked with the Blue Arrow. This one is far less neat as it does not actually touch any Peaks on the Price Chart - so it is of questionable value really. However, the Blue Line runs nicely Parallel to the bottom Black Line and it would be understandable if cautious Bulls waited for a Breakout of the Blue Line before buying in.

I had decided from the Fundamentals Viewpoint that I wanted to buy more of the Stock and because the Red Line seems more valid, I am happy to buy on the Breakout from the Red Line. As you can see, the Breakout occurred many weeks ago and to be honest I was looking for a more purposeful Buy Signal - but nothing has been forthcoming until now.

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On the Chart below, I have zoomed in to really just 2015 and I have drawn in the Uptrend Lines for a Channel that has developed over this time. It is a ‘Slow’ Uptrend in that it is very shallow (almost flat !!) and the Price is just slowly grinding upwards.

For clarity, the Green Line with the Green Arrow shows the bottom line of the Uptrend Channel and the sort of Mauvey Line with the sort of Mauvey Arrow shows the topline of the Uptrend Channel.

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I have thrown in the Chart below to show how the Dark Blue Line of the 50 day Moving Average (marked with a Black Arrow) is coming up to the Lighter Blue Line of the 200 day Moving Average (marked with the Blue Arrow), from underneath and it looks like it could cross over and form a ‘Bullish Golden Cross’.

It is also worth noting that some Traders / Investors will be waiting for the Price to get above the 200 day Moving Average before they buy in to the Stock - this is because the 200 day MA can often act as Resistance and a breakthrough of this Line would mean it should then become a Support Level for further rises to build from.

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On the Chart below, I have zoomed in to the last 6 months or so, and the Black Arrow points out where the Red 13 day Exponential Moving Average (EMA) has crossed over the Green 21 day Exponential Moving Average - this is a good sign as it usually means the Stock will keep going up for a few weeks at least.

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On the Chart below, please look at the bottom window which shows the RSI (Relative Strength Index) Indicator. Here I have marked the usual RSI 30 and RSI 70 Levels which are Oversold and Overbought respectively. You should be able to see that the RSI when I made my Buy Decision was up around 55 - so it has plenty of room to move up some more before getting Overbought and the Blue Sloping Line shows how the RSI has been trending up - this is good for Bulls.

I hope that helps explain my topup Buy, speak soon, wd

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