Up 57% this year, are boohoo shares headed to £1?

Many people buy clothes there boohoo (LSE: BOO) for cheap and fun stuff. But while boohoo shares have been cheap, for most of the last year owning them has not made me happy.

They have fallen 35% in 12 months – and 60% in the past five years.

But lately, boohoo’s stock has been underperforming.

So far this year, they are up 57%. Stocks have positive momentum. With the company due to announce its results in May, I think the stock could advance further before expecting the company to announce that the worst of its problems are behind it.

Can shares reach £1 each – and what does that mean for my holdings?

Business insight

I think boohoo shares could still hit £1 again. But before that happens, I think that the company should show real evidence of its business, such as positive sales growth trends and high profits. Last year, the company collapsed to a loss of £4m after reporting a profit of £93m the previous year.

So far in the current financial year, signs of improvement are limited. In the four months to December 31, revenue fell across all regions. The company’s total revenue is down 11% year over year. The company has predicted a 12% decline in revenue for the entire year.

Margin forecast for the year is 3.5%. That would equate to approximately £60m. But this is not profit, but adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA). Last year’s adjusted EBITDA slightly more than doubled, but boohoo still made a loss after tax. On that basis, I think there may be another loss in the current financial year.

In other words, on its current trajectory, I don’t expect boohoo to show the kind of business that will get investors to mark the shares back up to £1 or higher.

The momentum is strong

But if that’s the case, why has boohoo’s stock more than halved in three months?

After all, since then, the only big news is the January trading update (which has no surprises) and some developments that I see as negative: moving the registered office offshore and setting up a very good incentive plan. This will reward the manager handsomely for getting boohoo shares back to the price before (in my opinion) poor management decisions caused the price to collapse.

Partly I think investors are warming up to the rag trade again. Cost inflation seems to have peaked, although risks remain, logistical logjams have eased, and consumers are still spending despite the tough economy. That bodes well for future demand and boohoo well-placed to benefit from it.

I also think there is a fundamental revaluation of boohoo shares. Even after the increase, the market capitalization is £750m. For a company that generated almost £100m in revenue just a few years ago, it seems cheap.

So, I’m going to hold onto my shares because I think they can cross the £1 mark again and indeed go higher, as long as the business shows that it’s on the right track again. It probably won’t happen, but I hope it does at some point in the next few years.