Five points supporting the Boohoo share price at 262.5p
Often the real stock market winners are not the shares that look obviously cheap compared to book value or earnings but are instead the slightly more expensive high quality operators with improving outlooks.
Boohoo (LON:BOO) is one of them. Here's why this might be the case.
Top analysts and investors such as Warren Buffett and Michael Mauboussin say capital allocation - the deployment of company time, money, ideas, and people - is the key to building moat-like quality and profitability characteristics. It is perhaps the most fundamental driver of future share price performance. If you find a company that consistently allocates its capital profitably, chances are you are onto a long-term winner. I think Boohoo might be one such company.
Screening for upwardly mobile, high quality companies
If you’re only looking at sales and earnings growth, there is a vital question not being considered: how is this growth being funded?
That’s where ratios like return on equity (ROE) come in. ROE measures how efficiently a company uses Shareholders’ Equity to generate profits. It is calculated by dividing net income by book value of equity.
It’s no coincidence that Buffett is a fan of the measure - companies with high ROEs tend to exhibit the high-quality, moat-like business traits that he is so fond of gaining exposure to.
To find high ROE stocks whose fantastic business models are being rewarded by the market, you can create a screen that selects only stocks with both positive one-year relative strength and upgraded current year broker forecasts. The former ensures these shares have been outperforming the market and the latter suggests outperformance can continue.
One of the stocks that currently qualifies for this simple screen is Boohoo. The group has:
- A trailing twelve month return on equity of 22.3%
- An average current year EPS forecast upgrade of 5.70% from brokers, and
- A one-year relative strength of 17.9%
Stocks exhibiting these traits are typically a solid mix of quality and momentum. We can see this using the StockRanks: Boohoo has a Quality Rank of 98 and a Momentum Rank of 89.
What does this mean for potential investors?
Some of the best quality stocks in the market have defensible models that can deliver high levels of shareholder returns over the long term. But there are no guarantees and it's important to do your own research. Indeed, we've identified some areas of concern with Boohoo that you can find out about here.
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