Warren Buffett suggested that if we buy hamburgers regularly, we should want the price to go down rather than up, so that we can get more for our money. Should we think of stocks the same way? If the idea is good, the Boohoo (LSE:BOO) Stock market crash would mean investors rush to stock up.
Well, there is a weakness in the analogy. We don’t hope to one day sell our collection of 20-year-old burgers to raise money for our retirement. But I think that holds up well for our near-term outlook for stock prices. And that’s part of the reason why I doubled my Boohoo investment. Did I make a wise decision or did I spend a lot of money after the bad?
When I first invested in Boohoo shares at the end of 2020, I paid 314p for them each. By early February this year, Boohoo’s share price had crashed around the 100p mark. I had lost two-thirds of my initial investment. Ouch!
Buy, sell or what?
The question, as always when looking at a losing investment, is what to do next. Well, there is only one approach for me, and that is to reassess the stock on its current merits. Forget where the stock price was in the past, today’s valuation is the only one that matters.
If I think I’m looking at a lost cause that’s really sinking, I’ll sell and walk away. If the drop seems warranted relative to the company’s long-term potential, but the valuation feels right now, I’ll probably hold. But if I see that the price drop is exaggerated, I will want to buy more. And so I reloaded on February 3, doubling my initial investment, paying 102p per share.
Load more Boohoo shares
I got three times as many shares this time for the same price. It wasn’t an obvious purchase, however. Indeed, the fall in Boohoo’s share price was precipitated by genuine weak performance.
A warning issued in December accelerated the decline. Previous forecasts for net sales growth of between 20% and 25% for the year ending February 28, 2022 have been revised downwards. The new figure of 12% to 14% is seriously down. What’s wrong ? Much of this is related to the disruption of international deliveries and cost inflation in the wake of the pandemic.
For the three months to November 30, all international sales fell. Only sales in the UK increased by 32%. UK sales account for more than 60% of the total, however, which helped soften the blow.
2022 Boohoo Share Price Risk
What is the risk of my purchase now? I suspect that the economic difficulties will continue for some time to come and Boohoo’s share price could experience an extended period of weakness. And we may not see much improvement until the international infrastructure is strengthened.
On the positive side, I think the market is currently underestimating Boohoo’s long-term potential. I don’t want to trust the forecast too much at this stage, as we are still a long way from a return to stability. But analysts appear to be optimistic about long-term growth. I am with them.
Alan Oscroft owns the boohoo group. The Motley Fool UK recommended the boohoo band. The opinions expressed on the companies mentioned in this article are those of the author and may therefore differ from the official recommendations we give in our subscription services such as Share Advisor, Hidden Winners and Pro. At The Motley Fool, we believe that considering a wide range of information makes us better investors.